The Effect of Loan Sales on the Capital Structure of Banks

32 Pages Posted: 14 May 2018

See all articles by Özlem Dursun-de Neef

Özlem Dursun-de Neef

Monash Business School - Department of Banking and Finance

Date Written: November 15, 2012

Abstract

This paper addresses the question whether the existence of a secondary loan market changes the capital structure decision of banks. The results show that banks issue more debt if there is a secondary loan market in good times, when loans are sold at the fair price. The fair price ensures that an increase in investment increases the profit of the bank. On the other hand, banks issue less debt if there is a secondary loan market in bad times. This implies that the effect of loan sales on the bank's capital structure depends on the state of the economy. The bank engages in over-investment, if it can sell its loans in the secondary loan market in good times, as opposed to under-investment in bad times. In summary, the existence of a secondary loan market amplifies the effects of booms and busts linked to macroeconomic cycles.

Keywords: Loan Sales, Secondary Loan Markets, Securitization, Bank Capital Structure

JEL Classification: G21, G28

Suggested Citation

Dursun-de Neef, H. Özlem, The Effect of Loan Sales on the Capital Structure of Banks (November 15, 2012). Available at SSRN: https://ssrn.com/abstract=3171374 or http://dx.doi.org/10.2139/ssrn.3171374

H. Özlem Dursun-de Neef (Contact Author)

Monash Business School - Department of Banking and Finance ( email )

Melbourne
Australia

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
83
Abstract Views
523
Rank
539,499
PlumX Metrics