Banks and loan sales Marketing nonmarketable assets

Gorton, Gary; Pennacchi, George

doi:10.1016/0304-3932(95)01199-x

Cited by 506 publications

(312 citation statements)

References 19 publications

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“…The early literature on credit risk transfer emphasized the reduced monitoring incentives of banks, once a loan has been transferred to a third party (see, e. g., Pennacchi, 1988;Gorton and Pennacchi, 1995). 2 However, recent empirical findings also suggest that there has been an expansion of low quality loans.…”

Section: Introductionmentioning

confidence: 99%

Credit Risk Transfer and Bank Competition

Hakenes

Schnabel

2009

SSRN Journal

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We present a banking model with imperfect competition in which borrowers' access to credit is improved when banks are able to transfer credit risks. However, the market for credit risk transfer (CRT) works smoothly only if the quality of loans is public information. If the quality of loans is private information, banks have an incentive to grant unprofitable loans in order to transfer them to other parties, leading to an increase in aggregate risk. Nevertheless, the introduction of CRT generally increases welfare in our setup. However, under private information, higher competition induces an expansion of loans to unprofitable firms, which in the limit offsets the welfare gains from CRT completely.

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Section: Introductionmentioning

confidence: 99%

Credit Risk Transfer and Bank Competition

Hakenes

Schnabel

2009

SSRN Journal

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“…The financial institution has a competitive advantage in originating loans but other parties (investors) have a competitive advantage in managing the loans; similarly, the financial institution has other profitable investment projects but faces a financial constraint while investors have idle capital (e.g. Gorton and Pennacchi (1995)). …”

Section: Interpretations Of Retention Cost Cmentioning

confidence: 99%

“…Retaining partial interests by the bank could be a solution to both its information advantage over investors or its unobservable incentive to improve the value of loans (e.g. Leland and Pyle (1977); Gorton and Pennacchi (1995);DeMarzo and Duffie (1999)). There is also empirical evidence indicating that banks do have private information and use retention as a signal (e.g.…”

Section: Performance Of Proportional Retentionmentioning

confidence: 99%

“…Common examples of other mechanisms include the design of retained securities (Innes (1990); DeMarzo and Duffie (1999);Fender and Mitchell (2009)) and performance-contingent contracts (Akerlof (1970); Gorton and Pennacchi (1995)). Notwithstanding the difficulty of a comparison of more general mechanisms, we can show any contingent contract to be equivalent to proportional retention provided that the bank's regulatory cost is proportional to the bank's risk exposure resulting from the contract.…”

Section: Performance Of Proportional Retentionmentioning

confidence: 99%

“…The key in our model is to endogenize the bank's decision to hold a loan on its balance sheet. To this end, we adopt the well-established "skin in the game" model (e.g., Gorton and Pennacchi (1995); DeMarzo and Duffie (1999)). In the model banks follow the originate-to-distribute lending model (hereafter OTD model): they have expertise in originating loans but seek to sell their loans after origination to avoid the retention's regulatory cost.…”

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confidence: 99%

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Where Does the Information in Mark-to-Market Come From?

Bleck

Gao

2011

SSRN Journal

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We study the effects of mark-to-market accounting (MTM) for banks following the originate-to-distribute lending model. Banks have expertise in originating loans but it is costly for them to retain the loans on their books. We study how the accounting measurement of the retained loans affects the banks' origination and retention decisions.We show that, relative to historic cost accounting (HC), MTM has three consequences.First, it improves the accuracy of loan valuation ex post. Second, it forces banks to retain more risk exposure on their own books. Finally, it can reduce ex-ante origination efforts and lower the average quality of loans in the economy. To the extent that lower loan quality and banks' excessive risk exposure are two important ingredients for the recent financial crisis, we identify one mechanism through which MTM could contribute to financial crises.

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