Moral hazard and adverse selection in the originate-to-distribute model of bank credit

Bank credit has evolved from the traditional relationship banking model to an originate-to-distribute model. We show that the borrowers whose loans are sold in the secondary market underperform their peers by about 9% per year (risk-adjusted) over the three-year period following the initial sale of their loans. Therefore, either banks are originating and selling loans of lower quality borrowers based on unobservable private information (adverse selection), and/or loan sales lead to diminished bank monitoring that affects borrowers negatively (moral hazard). We propose regulatory restrictions on loan sales, increased disclosure, and a loan trading exchange/clearinghouse as mechanisms to alleviate these problems.     

美国银行贷款销售:发展、现状与启示

银行贷款二级销售市场是美国发展最快的金融市场之一,本论文从多个角度较为全面地考察了美国银行的贷款销售行为,包括美国银行贷款销售的发展历史、发展现状、银行贷款的销售动机以及贷款销售本身对银行的影响等问题,分析了中国银行贷款销售的现状及原因,认为中国银行应加强投行业务创新,从积极的信用风险管理和经营模式创新的角度来大力发展贷款销售业务.     

Capital Constraints,Asymmetric Information,and Internal Capital Markets in Banking: New Evidence

A growing literature investigates the role of internal capital markets in mitigating financial constraints faced by the subsidiaries of a conglomerate. Most studies have relied on indirect tests based on correlations between the cash flows and the investment of the subsidiaries. In contrast, we avoid the widespread criticisms of such specifications by providing direct tests that focus on the mechanisms through which internal reallocations of funds occur. We find that internal capital markets are used by multibank holding companies to mitigate capital constraints faced by individual bank subsidiaries. In addition, we show that internal capital management within a multibank holding company involves not only the movement of capital to those subsidiaries with a relatively greater need for capital but also the movement of assets (loans) from less well capitalized to better capitalized subsidiaries by means of loan sales and purchases among the subsidiaries. Furthermore, net loan sales are used to allow efficiency‐enhancing specialization among bank subsidiaries, insofar as those subsidiaries with the best loan origination opportunities are able to focus on loan originations even if they do not have sufficient capital to hold the loans. Our evidence is consistent with banks affiliated with holding companies more actively participating in loan sales and purchases because, by using their internal secondary loan market, they are able to avoid the “lemons” problem faced by stand‐alone banks.     

Credit risk transfer in U.S. commercial banks: What changed during the 2007–2009 crisis?

Following the debate on the role of credit risk transfer (CRT) in exacerbating the 2007–2009 crisis, this paper investigates the usage and effects of loan sales, securitization, and credit derivatives in U.S. commercial banks over the last decade, with special emphasis on the financial crisis. We find that in times of severe funding constraints, the need to raise financial resources becomes the principal incentive behind CRT. We document some beneficial effects of CRT on the economy, since the funds released through CRT are subsequently invested by banks to sustain credit supply, also in recession. However, we report higher overall riskiness in banks that engage intensively in loans sales and securitization, which translates into higher default rates during the crisis. Interestingly, the benefits and drawbacks of CRT are much stronger for loan sales and securitization than for credit derivatives.     

Banks' Advantage in Hedging Liquidity Risk: Theory and Evidence from the Commercial Paper Market

Banks have a unique ability to hedge against market‐wide liquidity shocks. Deposit inflows provide funding for loan demand shocks that follow declines in market liquidity. Consequently, banks can insure firms against systematic declines in liquidity at lower cost than other institutions. We provide evidence that when liquidity dries up and commercial paper spreads widen, banks experience funding inflows. These flows allow banks to meet loan demand from borrowers drawing funds from commercial paper backup lines without running down their holdings of liquid assets. We also provide evidence that implicit government support for banks during crises explains these funding flows.     

BANK LOAN SALES: A NEW LOOK AT THE MOTIVATIONS FOR SECONDARY MARKET ACTIVITY

Bank lending traditionally involves the extension of credit that is held by the originating bank until maturity. Loan sales allow banks to deviate from this pattern by transferring loans in part or in their entirety from their own books to those of another institution. I use a new methodology to test the validity of two hypotheses regarding banks' motivations for selling and buying loans: (1) the comparative advantage hypothesis, that banks with a comparative advantage in originating loans sell and those with a comparative advantage in funding loans buy; and (2) the diversification hypothesis, that banks lacking the ability to diversify internally use loan sales and purchases to achieve diversification. I also address the possibility that information asymmetries may increase the cost of participating in secondary markets. Particular attention is paid to the importance of affiliate relationships in overcoming informational barriers to participation. The empirical evidence presented here helps clarify the benefits of an active secondary loan market and generates predictions regarding the future of that market in a world of rapid consolidation and disappearing barriers to geographical expansion.     

Value Creation through Securitization: Evidence from the CMBS Market

Despite recent volatility and constraints in secondary market funding, analysts have ascribed substantial value creation to the securitization of commercial mortgages. Such value creation likely emanates from liquidity enhancements, regulatory arbitrage, price discrimination and risk diversification by pooling and tranching, gains from specialization in origination, servicing, and holding of mortgages, and the like. Indeed, such value creation would be consistent with past accelerated growth in the mortgage- and asset-based securities markets and the sizable profits earned by secondary market intermediaries. In this paper, we estimate the pricing effects of commercial mortgage securitization. We do so by applying loan level data from 1992–2003 to compare the pricing of conduit and portfolio loans held in CMBS structures. In contrast to portfolio loans, which are held for investment by originating institutions, conduit loans are originated for the sole purpose of sale and securitization in the secondary market. If securitization creates value, it should be evidenced in the relative pricing of conduit loans sold into CMBS pools and in a lower cost of capital to loan originators. We estimate a reduced-form model, in which the interest rate spread between commercial mortgages and comparable-maturity treasury securities varies with loan characteristics, capital market conditions, and conduit loan status. Estimation results indicate that securitization of conduit loans leads to an 11 basis points reduction in commercial mortgage interest rates. We assess robustness of results via hazard model tests for omitted variables and originator-specific effects. We further estimate a simultaneous equations model that accounts for the potential endogeneity of mortgage loan terms to the mortgage-treasury rate spread. Results of that analysis suggest a larger 20 basis points reduction in loan pricing among conduit loans sold into CMBS structures.     

Securitization,competition and monitoring

We analyze the impact of loan securitization on competition in the loan market. Using a dynamic loan market competition model where borrowers face both exogenous and endogenous costs to switch between banks, we uncover a competition softening effect of securitization that allows banks to extract rents in the primary loan market. By reducing monitoring incentives, securitization mitigates winner’s curse effects in future stages of competition thereby decreasing ex ante competition for initial market share. Due to this competition softening effect, securitization can adversely affect loan market efficiency while leading to higher equilibrium profits for banks. This effect is driven by primary loan market competition, not by the exploitation of informational asymmetries in the secondary market for loans. We also argue that banks can use securitization as a strategic response to an increase in competition, as a tool to signal a reduction in monitoring intensity for the sole purpose of softening ex ante competition. Our result suggests that securitization reforms focusing exclusively on informational asymmetries in markets for securitized products may overlook competitive conditions in the primary market.     

An Analysis of Mortgage Contracting: Prepayment Penalties and the Due-on-Sale Clause

The due-on-sale clause contained in most conventional home mortgage contracts is equivalent to a prepayment penalty equal to the difference between the face value and market value of the loan. We analyze a bilateral game with asymmetric information and show that the bank demands the full penalty unless the market value of the loan is sufficiently low. In that case, the bank demands a prepayment penalty which is independent of the market value of the loan in order to induce additional prepayments. We also demonstrate, by a risk-sharing argument, that the due-on-sale clause is optimal in some settings, even though it eliminates some beneficial home sales.     

Multinational banks in the crisis: Foreign affiliate lending as a mirror of funding pressure and competition on the internal capital market

We investigate how the lending activities abroad of a multinational bank’s local and hub affiliates have been affected by funding difficulties during the financial crisis. We find that affiliates’ local deposits and performance have been stabilizing loan supply. By contrast, relying on short-term wholesale funding has increasingly proven to be a disadvantage in the crisis, which has seen inter-bank and capital markets freeze. By introducing a liable approximate measure for intra-bank flows, we detect competition for intra-bank funding between the affiliates abroad as well as an increasing focus on the parent bank’s home market activities. In addition, the more an affiliate abroad relies on intra-bank funding in the crisis, the greater its dependence on its parent bank having a stable deposit and long-term wholesale funding position. We consider changes in long-term lending to the private sectors of 40 countries by the affiliates of the 68 largest German banks. To obtain a more precise picture, we clean our lending data from valuation effects.     

Asymmetric information,adverse selection,and the pricing of CMBS

We demonstrate that asymmetric information between sellers (loan originators) and purchasers (investors and securities issuers) of commercial mortgages gives rise to a standard lemons problem, whereby portfolio lenders use private information to liquidate lower quality loans in commercial mortgage-backed securities (CMBS) markets. Conduit lenders, who originate loans for direct sale into securitization markets, mitigate problems of asymmetric information and adverse selection in loan sales. Our theory provides an explanation for the pricing puzzle observed in CMBS markets, whereby conduit CMBS loans are priced higher than portfolio loans, despite widespread belief that conduit loans are originated at lower quality. Consistent with theoretical predictions of a lemons discount, our empirical analysis of 141 CMBS deals and 16,760 CMBS loans shows that, after controlling for observable determinants of loan pricing, conduit loans enjoyed a 34 basis points pricing advantage over portfolio loans in the CMBS market.     

疫情对企业融资的影响研究--来自银团贷款市场的经验证据

新冠肺炎疫情在全球蔓延,引发市场对企业经营、融资等问题的担忧。为进一步做好金融支持疫情防控工作、维护疫情期间金融市场稳定,本文通过研究历史视角下疫情对企业融资的影响机制,提出疫情防控期间金融支持相关的政策建议。本文利用1990-2018年汤森路透Dealscan数据库公布的企业银团贷款数据和手工收集全球重大疫情数据,实证研究了疫情对企业银团贷款的影响机制。研究发现:疫情发生后,企业银团贷款利率和贷款额度均显著增加,而银团贷款期限没有表现出显著变化。在考虑不同期限疫情观测时间窗和政策利率的滞后性影响等因素后,该结论依然成立。疫情对企业银团贷款的影响渠道包括避险情绪和融资流动性等。进一步研究发现,疫情期间政策利率调控效果有限,不同国家和地区的企业融资受疫情的影响存在差异。基于此,本文认为金融监管部门应进一步加大对企业信贷利率支持力度,完善货币政策有效性评估及动态调整机制,及时疏通货币政策传导,约谈恶意抬高信贷利率的金融机构,同时强化与财政、产业等政策的协调机制,合力支持疫情防控,维护经济金融稳定。     

Bank Funding,Securitization, and Loan Terms: Evidence from Foreign Currency Lending

We examine how bank funding structure and securitization activities affect the currency denomination of business loans. We analyze a unique data set that includes information on the requested and granted loan currency for 99,490 loans granted to 57,464 firms by a Bulgarian bank. Our findings document that foreign currency lending is at least partially driven by bank eagerness to match the currency structure of assets with that of liabilities. Our results also show that loan currency, as well as loan amount and maturity, are adjusted to make loans eligible for securitization.     

Surviving the perfect storm: The role of the lender of last resort☆

When banks are hit by a severe liquidity shock, central banks have a key role as lenders of last resort. Despite the well-established importance of this mechanism, it is challenging to analyze it empirically. We explore a unique setting in which banks suddenly lost access to market funding due to contagion fears at the onset of the euro area sovereign debt crisis. Using monthly data at the loan, bank, and firm level, we test the role of the central bank in a scenario of imminent collapse. We find that the liquidity obtained from the central bank played a key role in temporarily supporting the supply of credit to the real economy. However, the subdued loan demand, together with moral suasion and carry trade incentives, led to an increase in banks’ sovereign bond holdings using central bank funding.     

Neuausrichtung des Hypothekenkreditgeschäfts in der Lebensversicherung durch Kreditverkäufe

Loan portfolio sales represent a valid option to restructure the life insurer’s real estate loan business. Latest market experience gained by vendors from the German banking industry is positive as there has grown a liquid and professional market in Germany over the last few years. Some German life insurers have already utilised this market to sell loan portfolios and restructure their real estate loan business accordingly. Potential vendors from the insurance industry can rely on the given market experience and professional assistance to design the transaction process and the restructuring result efficiently.     

The Behavior of an Institutional Investor with Arbitrage Opportunities and Liquidity Risk

This study analyzes the efficiency of liquidity flows in stabilizing distressed markets from a theoretical perspective. We show that even in the event of a major negative market shock, a financial institution can increase its investment in the market when there is a strong incentive for arbitrage profit. However, the institution may choose to reduce its investment if the fear from liquidity risk exceeds the arbitrage incentive. In addition, our model reveals a positive relationship between funding liquidity and market liquidity. Our findings help to explain several financial issues in distressed markets, including the flight to quality, liquidity dry-ups, asset fire sales, and market shock amplifications.     

The effect of payday lending restrictions on liquor sales

We exploit a change in lending laws to estimate the causal effect of restricting access to payday loans on liquor sales. Leveraging lender- and liquor store-level data, we find that the changes reduce sales, with the largest decreases at stores located nearest to payday lenders. By focusing on states with state-run liquor monopolies, we account for endogenous supply-side variables that are typically unobserved. Further analysis of consumer-level data indicates that the lending restrictions reduce alcohol expenditures without affecting total household spending. This is consistent with a distinct relationship between payday lending access and alcohol purchases, and suggests that present biased motivations underlie some loan use. The finding is significant because it shows that payday loan access is associated with unproductive borrowing, and directly links payday loan access to public health issues.     

Financial Restatements, Cost of Debt and Information Spillover: Evidence From the Secondary Loan Market

Abstract:  In this paper, we investigate the effect of financial restatements on the debt market. Specifically, we focus on the secondary loan market, which has become one of the largest capital markets in the US, and ask the following: (1) whether financial restatements increase restating firm's cost of debt financing and (2) whether the information about restatements arrives at the secondary loan market earlier than at the stock market? Using 176 restatement data, we find significant negative abnormal loan returns and increased bid-ask spreads around restatement announcements. Furthermore, this negative loan market reaction is more pronounced when the restatement is initiated by either the SEC or auditors, and when the primary reason for restatement is related to revenue recognition issues. Additionally, we find restatement information arrives at the secondary loan market earlier than at the equity market, and that such private information quickly flows into the equity market. We also show that stock prices begin to decline approximately 30 days prior to the restatement announcements for firms with traded loans. However, we do not find such informational leakage for firms without traded loans. Collectively, the results of this paper suggest: (1) increased cost of debt financing after restatements and (2) superior informational efficiency of the secondary loan market to the stock market.     

Bank lending opportunities and credit standards

This article empirically tests the hypothesis that credit-screening standards can be first increasing and then decreasing in the quality of the bank's pool of potential borrowers, which in turn may vary through the business cycle or across different segments of the lending markets. A key implication is that banks with lending opportunities toward the middle of the quality spectrum can have loan portfolios that perform better than do the portfolios of banks with loan-origination opportunities that are either too weak or too strong. Using banks’ volume of secondary-market loan sales as a proxy for the richness of lending opportunities, I find an inverse U-shaped relation between the performance of banks’ loan portfolios and their activity in the loan sales market. The pattern deserves scrutiny for its policy implications, as many regulators hold the view that countercyclical variation in credit standards may have a destabilizing effect on business cycles.     

Small Firm Capital Structure and the Syndicated Loan Market

We show that small firms using syndicated loans for their mid- and long-term financial needs have significantly higher leverage than firms that do not borrow in this market. This difference cannot be attributed to firm characteristics like the availability of growth opportunities, asset tangibility, R&D spending, profitability and net sales that are known to influence capital structure. We also find that the capital structure of other firms that borrow in the syndicated loan market is not different from those that do not. We show that already highly leveraged small firms are more likely to borrow in the syndicated loan market than other firms. The higher debt in the capital structure of small firms that rely on syndicated loans consequently can be attributed to the availability of capital rather than demand for capital, as shown more generally by Faulkender and Petersen (Rev Financ Stud 19(1):45?C79, 2006).