Moral hazard and adverse selection in the originate-to-distribute model of bank credit

Antje Berndt and Anurag Gupta

Journal of Monetary Economics, 2009, vol. 56, issue 5, 725-743

Abstract: Bank credit has evolved from the traditional relationship banking model to an originate-to-distribute model. We show that the borrowers whose loans are sold in the secondary market underperform their peers by about 9% per year (risk-adjusted) over the three-year period following the initial sale of their loans. Therefore, either banks are originating and selling loans of lower quality borrowers based on unobservable private information (adverse selection), and/or loan sales lead to diminished bank monitoring that affects borrowers negatively (moral hazard). We propose regulatory restrictions on loan sales, increased disclosure, and a loan trading exchange/clearinghouse as mechanisms to alleviate these problems.

Keywords: Syndicated; loans; Secondary; loan; market; Originate-to-distribute; Moral; hazard; Adverse; selection (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (91)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:56:y:2009:i:5:p:725-743

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