Are Banks Still Special When There Is a Secondary Market for Loans?

Abstract

Secondary market trading in loans elicits a significant positive stock price response by a borrowing firm's equity investors. We find the major reason for this response is the alleviation of borrowing firms’ financial constraints. We also find that new loan announcements are associated with a positive stock price effect even when prior loans made to the same borrower already trade on the secondary market. We conclude that the special role of banks has changed due to their ability to create an active secondary loan market while simultaneously maintaining their traditional role as information producers.

Time-varying systematic and idiosyncratic risk exposures of US bank holding companies

“…They base their arguments on several regulatory and policy changes during the 1990s that have increased the marketability of bank loans and lead to the substantial growth in securitization and secondary loan markets. 23 In fact, Gande and Saunders (2012) support this increased commoditization of bank loans through the emergence of active secondary markets over the last two decades. They conclude that these developments also have altered the nature of bank specialness by combining their traditional role as information producers and monitors with their importance for creating an active secondary market for bank loans.…”

The Costs of Being Private: Evidence from the Loan Market

“…We use daily mid quotes to proxy for the transaction price. To analyze 22 For more details about the secondary loan market and this dataset see for example Gande and Saunders (2008) and Wittenberg-Moerman (2005).…”

The Role of Banks in the Transmission of Monetary Policy

“…However, their sample includes only publicly traded firms, precisely those firms that are the least likely to be bank dependent. Consistent with the view of Fields et al (2006), Gande and Saunders (2012) argue that the development of the secondary loan market has reduced to some extent the 'specialness' of banks due to the weakening of banks' incentives to monitor borrowers. Thus, the evidence from studies based on individual nonfinancial firms supports the proposition that many firms are, in fact, bank dependent, and that their economic activity is adversely affected by reductions in bank loan supply.…”