Title: The Effect of Loan Sales on the Capital Structure of Banks
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.
Publication Year: 2012
Publication Date: 2012-01-01
Language: en
Type: article
Indexed In: ['crossref']
Access and Citation
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot