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Bank Competition, Directed Search, and Loan Sales

Kevin Huang (), Zhe Li () and Jianfei Sun ()
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Jianfei Sun: Shanghai Jiao Tong University

No 18-00001, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: We develop a theory of loan sales based on bank competition and entrepreneur directed search. We show how the interplay of the two can reduce interest rate on loans financed through on-balance-sheet activities and how this can motivate loan sales as a strategy of financing through off-balance-sheet activities. The results shed some light on the shift over the years preceding the recent financial crisis in the practice of U.S. and European banks, from the traditional ‘originate to hold' model of credit provision, towards the ‘originate to distribute' approach for credit extension, that is, the emergence of a ‘shadow banking system'.

Keywords: Bank competition; Directed search; Loan sales; Shadow banking (search for similar items in EconPapers)
JEL-codes: E4 (search for similar items in EconPapers)
Date: 2018-01-12
New Economics Papers: this item is included in nep-ban and nep-com
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