DP9084 Loan Sales and Screening Incentives

Author(s): Helmut Bester, Thomas Gehrig, Rune Stenbacka
Publication Date: September 2012
Keyword(s): loan sales, screening, securitization
JEL(s): D83, G21, G32, L15
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9084

We analyze the effect of loan sales on the intensity of costly screening. Loan sales strengthen screening incentives when screening primarily improves the bank?s ability to identify profitable loans and when banks retain most of those profitable loans. However, loan sales dampen screening incentives when the benefit of screening primarily helps to weed out unprofitable projects. Moreover, alternative institutions of information production and the institutional market framework affect the relative benefits and costs of loan sales, and screening respectively. Accordingly, the potential regulation of loan sales has to take into account the whole impact on societal information production, both in markets and non-market institutions.