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The Dynamics of Loan Sales and Lender Incentives

Author

Listed:
  • Sebastian Gryglewicz
  • Simon Mayer
  • Erwan Morellec

Abstract

How much of a loan should a lender retain, and how do loan sales affect loan performance? We address these questions in a model in which a lender originates loans that it can sell to investors. The lender reduces default risk through screening at origination and monitoring after origination, but is subject to moral hazard. The optimal lender-investor contract can be implemented by requiring the lender to initially retain a share of the loan that it gradually sells to investors, rationalizing loan sales after origination. The model generates novel predictions linking loan and lender characteristics to initial retention, sales dynamics, and loan performance.

Suggested Citation

  • Sebastian Gryglewicz & Simon Mayer & Erwan Morellec, 2024. "The Dynamics of Loan Sales and Lender Incentives," The Review of Financial Studies, Society for Financial Studies, vol. 37(8), pages 2403-2460.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:8:p:2403-2460.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhae021
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    More about this item

    Keywords

    G21; G32;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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