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Loan Sales and Relationship Banking

Subject

Finance

Publishing details

Authors / Editors

Parlour C A;Plantin G

Publication Year

2007

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 financial 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 risk-based capital requirements may be socially desirable.

Publication Research Centre

Institute of Finance and Accounting

Series Number

FIN 470

Series

IFA Working Paper

Available on ECCH

No


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