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nBank Borrowers and Loan Sales

nThe article Bank Borrowers and Loan sales by Dahiya et al, 2003 assess empirically the influence of loan sales on both bank stock returns and borrowers. The authors suggest that there is a strong negative effect of sale of loans by the banks on returns of borrowers (Dahiya, Sandeep, Manju, and Anthony, 3). Some banks are reluctant to sell loans because they fear to harm prevailing and future relationship with customers. In addition, the author reveals that loan sales acts as a mirror image to indicate the positive news of loan renewal and loan initiation. Therefore, banks play a crucial role in diffusing private information to outside investors (Dahiya, Sandeep, Manju, and Anthony, 5). Loan sales may convey new information to the market concerning the quality of bank selling loan portfolio. It also affects the reputation and relationship with investors and customers.

nThe article Bank loan sales: A new look at the motivations for secondary market activity by Demsetz reports had indicated that loan sales by banks especially customer loans that have developed long-term customer relations with the bank have negative information effects concerning the borrowing company (Demsetz). Banks plays an important role as insiders to the borrower firms hence a decision to sell loans of the customer would be regarded as revealing private information of the borrower (Demsetz). The authors suggest that the new loans and loan renewal convey positive private information to the outside equity market concerning a borrowing financial condition of the firm. Bank loan announcement have a favorable, and robust effect on the stock returns of the firm (Demsetz). This is as compare to the negative response of investors to the announcement of new issuance of securities such as equity and public debts.

nThe article “The informational efficiency of the equity market as compared to the syndicated bank loan market” by Allen, Linda, and Aron, notes that there are factors that affect the decision of the bank to sell its loans. Firstly, banks decisions are influenced by its desire to mitigate taxes such as requirements of capital (Allen, Linda, and Aron). Secondly, the sale of loans mirrors the origination of the loan and distribution abilities of the bank. Thirdly, the likelihood of the bank to sell a loan is associated to the size of the bank and the trading income as a proportion of its assets (Allen, Linda, and Aron). Further, loan sales seem to have a minimum direct influence on the equity returns of the bank.

nThe article “Are banks still special when there is a secondary market for loans?” By Gande, and Anthony suggest that a bank decision to sell a loan may involve information on the quality of bank loan portfolios (Gande, and Anthony). Loan sales, indeed, are interpreted by the market as a reflection that average banks quality remaining portfolio due to incentive to divest, sell-off its poor quality loans (Gande, and Anthony). Nevertheless, in selling these kinds of loans, a bank must assess the potential cost of these sales and relationship with borrowers. In addition, the bank must assess its reputation with investors who buy loans from the banks.

nThe effects of the sales since it may indicate that the bank has poor management in its capital position and lending decisions. The sales of loan by banks do not have influence on net benefits or costs to the selling banks shareholders (Dahiya, Sandeep, Manju, and Anthony, 15). Banks are motivated to sell loans in order to improve the solvency of the bank position in capital ratio. Furthermore, the authors reveal that loan sales are beneficial to the bank because they gain substantial amount of trading income (Gande, and Anthony). For instance, many banks have a trading network and infrastructure that enables them to conduct sale of loans.

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nWork cited

nDahiya, Sandeep, Manju Puri, and Anthony Saunders. “Bank Borrowers and Loan Sales: New Evidence on the Uniqueness of Bank Loans*.” The Journal of business 76.4 (2003): 563-582. HYPERLINK “http://www.jstor.org/stable/10.1086/377031″http://www.jstor.org/stable/10.1086/377031

nDemsetz, Rebecca S. “Bank loan sales: A new look at the motivations for secondary market activity.” FRB of New York Staff Report 69 (1999). HYPERLINK “http://papers.ssrn.com/sol3/papers.cfm?abstract_id=163174″http://papers.ssrn.com/sol3/papers.cfm?abstract_id=163174

nGande, Amar, and Anthony Saunders. “Are banks still special when there is a secondary market for loans?.” The Journal of Finance 67.5 (2012): 1649-1684. HYPERLINK “http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2012.01769.x/abstract?deniedAccessCustomisedMessage=&userIsAuthenticated=false”http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2012.01769.x/abstract?deniedAccessCustomisedMessage=&userIsAuthenticated=false

nAllen, Linda, and Aron A. Gottesman. “The informational efficiency of the equity market as compared to the syndicated bank loan market.” Journal of Financial Services Research 30.1 (2006): 5-42. HYPERLINK “http://link.springer.com/article/10.1007/s10693-006-8738-z#page-1″http://link.springer.com/article/10.1007/s10693-006-8738-z#page-1