Syndication and Second Loan Sales

20 Pages Posted: 7 Jul 2008 Last revised: 18 Jul 2012

See all articles by Paolo Colla

Paolo Colla

Bocconi University - Department of Finance; Bocconi University - BAFFI Center on International Markets, Money, and Regulation

Filippo Ippolito

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics; Centre for Economic Policy Research (CEPR)

Date Written: November 7, 2009

Abstract

Syndication gives originating banks the opportunity to diversify part of their credit risk by selling loans to other members of the syndicate. However, as originating banks are less exposed to risk, their incentives to monitor borrowers diminish. We explore this trade-off with a theoretical model and show that in equilibrium loans trade at a discount because monitoring effort is sub-optimally low. We illustrate how this inefficiency is related to lack of transparency in the secondary loan market, and provide policy implications to address this problem.

Keywords: Secondary Loan Sales, Syndication, Monitoring, Incentives, Transparency

JEL Classification: G21, G28

Suggested Citation

Colla, Paolo and Ippolito, Filippo and Ippolito, Filippo, Syndication and Second Loan Sales (November 7, 2009). Available at SSRN: https://ssrn.com/abstract=1156302 or http://dx.doi.org/10.2139/ssrn.1156302

Paolo Colla

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Bocconi University - BAFFI Center on International Markets, Money, and Regulation ( email )

Milano, 20136
Italy

Filippo Ippolito (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(+34) 93 542 2578 (Phone)
(+34) 93 542 1746 (Fax)

Barcelona Graduate School of Economics ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom