Monitoring in Originate-to-Distribute Lending: Reputation versus Skin in the Game

Extremal equilibria of oligopolistic supergames

Andrew Winton and Vijay Yerramilli

The Review of Financial Studies, 2021, vol. 34, issue 12, 5886-5932

Abstract: Banks face liquidity and capital pressures that favor selling off the loans they originate, but loan sales undermine their monitoring incentives. A bank’s loan default history is a noisy measure of its past monitoring choices, which can serve as a reputation mechanism to incentivize current monitoring. In equilibrium, higher reputation banks monitor (weakly) more intensively; if retention is credible, they generally retain less of the loans they originate. Monitoring is difficult to sustain in periods with uncommonly large spikes in loan demand (“booms”), especially for low-reputation banks, which are more likely to accommodate boom demand and forgo monitoring.

JEL-codes: G21 L14 (search for similar items in EconPapers)
Date: 2021
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