Loan Sales and Relationship Banking

Parlour, C A and Plantin, G (2007) Loan Sales and Relationship Banking. Working Paper. London Business School IFA Working Paper.

Abstract

Firms raise money from banks and the bond market. Banks may sell loans in a secondary market to recycle their funds or to trade on private information. Liquidity in the secondary loan market depends on the relative likelihood of each motive for trade and affects firms' optimal ficial structure. The endogenous degree of liquidity is not always socially optimal: there is excessive trading in highly rated names, and insufficient liquidity in riskier bonds. The model provides testable implications for prices and quantities in primary and secondary loan markets, and in bond markets. Further, we posit that riskbased capital requirements may be socially desirable.