Loan Sales and Relationship Banking |
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| Authors: | CHRISTINE A PARLOUR GUILLAUME PLANTIN |
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| Institution: | Parlour is from the Haas School, UC Berkeley, and Plantin is from the London Business School. We have benefitted from helpful comments by Viral Acharya, Doug Diamond, Denis Gromb, Rupert Cox, Martin Ruckes, an anonymous referee, and the editor Rob Stambaugh. In addition, we thank seminar participants at Baruch, IHS (Vienna), the Federal Reserve Bank of New York, Center for Financial Studies Credit Risk Conference (Frankfurt), the London School of Economics, Yale, Stanford, the Western Finance Association, Berkeley, and the Federal Reserve Bank of Richmond. A previous version of this paper was entitled “Credit Risk Transfer.” |
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| Abstract: | Firms raise money from banks and the bond market. Banks sell loans in a secondary market to recycle their funds or to trade on private information. Liquidity in the loan market depends on the relative likelihood of each motive for trade and affects firms' optimal financial structure. The endogenous degree of liquidity is not always socially optimal: There is excessive trade in highly rated names, and insufficient liquidity in riskier bonds. We provide testable implications for prices and quantities in primary and secondary loan markets, and bond markets. Further, we posit that risk-based capital requirements may be socially desirable. |
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