Loan Resales, Asset Selection and Borrowing Cost

61 Pages Posted: 16 Mar 2006

See all articles by Mark J. Kamstra

Mark J. Kamstra

York University - Schulich School of Business

Gordon S. Roberts

York University - Schulich School of Business

Pei Shao

University of Northern British Columbia

Date Written: January 2006

Abstract

While a number of studies have addressed the motivations for, and interrelationships among loan sales, bank risk and liquidity, little empirical consideration has been given to banks' selection of loans for sale or to how loan resales impact initial loan pricing. The results suggest that shedding lower quality loans features prominently as a motive for secondary loan sales. Furthermore, a strong positive association is revealed between the ex ante probability of loan resales and the primary market loan spread. A change in the probability of loan resales from zero to one hundred percent elicits an increase in the primary loan spread of approximately 100 basis points, causing an adverse effect on borrowers. We conclude that loan resales represent a negative-information event and speculate that some of this negative impact results from the reduced monitoring efforts associated with a loan resale.

Keywords: Loan resales, syndicated loan, secondary loan market, financial institutions

JEL Classification: G32

Suggested Citation

Kamstra, Mark J. and Roberts, Gordon S. and Shao, Pei, Loan Resales, Asset Selection and Borrowing Cost (January 2006). EFA 2006 Zurich Meetings, Available at SSRN: https://ssrn.com/abstract=891304 or http://dx.doi.org/10.2139/ssrn.891304

Mark J. Kamstra

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Gordon S. Roberts

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 x77953 (Phone)
416-736-5687 (Fax)

Pei Shao (Contact Author)

University of Northern British Columbia ( email )

3333 University Way
Prince George, BC V2N 4Z9
Canada
250-960-5108 (Phone)
250-960-5544 (Fax)