Bank Borrowers and Loan Sales: New Evidence on the Uniqueness of Bank Loans*

Abstract

This paper examines the information content of the announcement of the sale of a borrower's loan by its bank. A large body of research has documented the positive impact on a firm's stock price around the announcement of formation and renewal of bank lending relationships. In light of these findings it would seem natural that when a bank chooses to sell off its loans, the stock returns of the borrower would be adversely affected. Our paper is the first study to test this hypothesis. We find that the stock returns of these borrowers are significantly negatively impacted on average for the period surrounding the announcement of a loan sale. The post-loan sale period is also marked by a large incidence of bankruptcy filings by the borrowers whose loans are sold. Overall, the evidence supports the hypothesis that the news of a bank loan sale has a negative certification impact, which is validated by the subsequent performance of the firm whose loan is sold. We conduct similar event study tests for those banks that engage in loan sales and find that the stock returns of the selling banks are not significantly impacted on average. Cross-sectional tests reveal that loan sales were made by banks that emphasized trading income and had relatively large Commercial and Industrial loan portfolios. For our sample period, a bank's capital adequacy position did not appear to have a material effect on a bank's decision to sell its loans.

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

“…5 Thus, a loan sale could threaten a bank-borrower relationship, and result in the termination of that relationship. Dahiya, Puri, and Saunders (2003;hereafter DPS study) analyze the effect of a loan sale on the equity value of borrowing firms whose loans were sold. Based on a sample of 29 borrowers during the 1995 to 1998 period, they find that the stock returns of borrowers were significantly negatively impacted by the announcement of a loan sale.…”

“…The above result reflects a sea change in the way the loan sale market impacts a borrower's shareholders compared to prior periods. For example, based on a sample of 29 borrowers during 1995 to 1998, Dahiya, Puri, and Saunders (2003) find that the reaction of equity investors to loan sales was negative, especially for distressed borrowers. In that study, it appears that many original lenders were terminating their lending relationship with a borrower after a loan sale, whereas in our study this is not the case (see Section I for more details).…”

How Much Do Banks Use Credit Derivatives to Hedge Loans?

“…Acharya and Johnson (2007) show that adverse information about a company can be incorporated in credit default swap prices before it gets incorporated in the stock price. Dahiya et al (2003) show that the announcement by a bank of a loan sale has an adverse impact on the borrower's stock price. Duffee and Zhou (2001) argue that a bank can use a credit-derivative contract to transfer loan risk for which its informational advantage is small and retain the portion of risk for which the bank's informational advantage is relatively large.…”

Securitization as a response to monetary policy

“…MBS provide a convenient vehicle for banks to remove their high-risk and low-liquidity loans from the balance sheet and replace them with cash (Altunbas et al, 2009;Berger & Udell, 1993;Carlstrom & Samolyk, 1995;Cerasi & Rochet, 2014;DeMarzo & Duffie, 1999). Even if banks' capital constraints are not very tight, they might feel uncomfortable with risk on their loans and may decide to convert some of them into MBS (Dahiya et al, 2003;Dell'Ariccia et al, 2012;Marsh, 2006). These assumptions on bank securitization are generally supported by empirical studies (Affinito & Tagliaferri, 2010;Cardone-Riportella, Samaniego-Medina, & Trujillo-Ponce, 2010).…”

“…In this study, we build a partial equilibrium model and examine how banks adjust their asset portfolio, particularly by using MBS, in response to changes in monetary policy. The literature identifies two motivations for banks to securitize loans: relaxation of capital constraints (also known as demand for liquidity, Altunbas, Gambacorta, & Marques, 2009;Berger & Udell, 1993;Carlstrom & Samolyk, 1995;Cerasi & Rochet, 2014;DeMarzo & Duffie, 1999) and transferring portfolio risks to third parties in the financial market (Dahiya, Puri, & Saunders, 2003;Dell'Ariccia, Igan, & Laeven, 2012;Marsh, 2006). These two motivations are considered as benefits of issuing MBS, which we model explicitly.…”