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A. Berndt and A. Gupta, “Moral Hazard and Adverse Selection in the Originate-to-Distribute Model of Bank Credit,” Journal of Monetary Economics, Vol. 56, No. 5, 2009, pp. 725-743. doi:10.1016/j.jmoneco.2009.04.002

has been cited by the following article:

• TITLE: Syndication and Secondary Loan Sales

  AUTHORS: Paolo Colla, Filippo Ippolito

  KEYWORDS: Secondary Loan Sales, Syndication, Monitoring, Incentives, Transparency

  JOURNAL NAME: Theoretical Economics Letters, Vol.1 No.3, November 3, 2011

  ABSTRACT: Secondary loan sales give originating banks the opportunity to diversify part of their credit risk by selling loans to other market participants. However, as originating banks are less exposed to risk after secondary loan sales, their incentives to monitor borrowers diminish. Secondary loan sales therefore involve a trade-off between diversification benefits and sub-optimal monitoring. We explore this trade-off within a theoretical model. The results show that in equilibrium loans trade at a discount because monitoring effort is sub-optimally low. We illustrate how this inefficiency is related to lack of transparency in the secondary loan market, and provide policy implications to address this problem.