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.
Original language | English (US) |
---|---|
Pages (from-to) | 5886-5932 |
Number of pages | 47 |
Journal | Review of Financial Studies |
Volume | 34 |
Issue number | 12 |
DOIs | |
State | Published - Dec 1 2021 |
Bibliographical note
Publisher Copyright:© 2021 The Author(s) 2021. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com.