Syndication and Secondary Loan Sales

Paolo Colla, Filippo Ippolito

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DOI: 10.4236/tel.[phone]                

Abstract

Secondary loan sales give originating banks the opportunity to diversify part of their credit risk by selling loans to other market participants. However, as originating banks are less exposed to risk after secondary loan sales, their incentives to monitor borrowers diminish. Secondary loan sales therefore involve a trade-off between diversification benefits and sub-optimal monitoring. We explore this trade-off within a theoretical model. The results show that in equilibrium loans trade at a discount because monitoring effort is sub-optimally low. We illustrate how this inefficiency is related to lack of transparency in the secondary loan market, and provide policy implications to address this problem.

Keywords

Secondary Loan Sales, Syndication, Monitoring, Incentives, Transparency

Conflicts of Interest

The authors declare no conflicts of interest.

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