Lending Competition and Loan Sales: A Macroeconomic Analysis Under Directed Search

Abstract

We present a macroeconomic analysis of loan sales driven by bank competition in lending and entrepreneur directed search for funding opportunities. We show how these two features of our macrofinance model can interact to reduce interest rates on loans financed via on‐balance‐sheet activities, and how this can motivate loan sales as a strategy of financing via off‐balance‐sheet activities. The results shed some light on the shift over the years preceding the global financial crisis in the practice of U.S. and European banks, from the traditional “originate‐to‐hold” model of credit provision, toward the “originate‐to‐distribute” approach for credit extension. (JEL E44, G21, G24).

On financial frictions and firm's market power

“…9 9 Following an alternative approach, and based on the seminal paper by Peters (1984), Huang et al. (2021) use constrained Bertrand competition as banks may face problems to raise enough deposits to finance loans. This setup is potentially interesting because the additional friction results in higher interest rates and some profit for the banks. …”