The Effect of Loan Sales on the Capital Structure of Banks
32 Pages Posted: 14 May 2018
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: Suggested Citation