Loan Resales, Asset Selection and Borrowing Cost

Abstract

While a number of studies have addressed the motivations for, and interrelationships among loan sales, bank risk and liquidity, little empirical consideration has been given to banks' selection of loans for sale or to how loan resales impact initial loan pricing. The results suggest that shedding lower quality loans features prominently as a motive for secondary loan sales. Furthermore, a strong positive association is revealed between the ex ante probability of loan resales and the primary market loan spread. A change in the probability of loan resales from zero to one hundred percent elicits an increase in the primary loan spread of approximately 100 basis points, causing an adverse effect on borrowers. We conclude that loan resales represent a negative-information event and speculate that some of this negative impact results from the reduced monitoring efforts associated with a loan resale.

Keywords: Loan resales, syndicated loan, secondary loan market, financial institutions

JEL Classification: G32