BANKS AND LOAN SALES - MARKETING NONMARKETABLE ASSETS

Theories of financial intermediation predict that bank loans should no t be marketable because of moral hazard problems; banks will not condu ct credit risk analysis or monitor borrowers if they are not at risk f or failing to perform these services. Throughout most of history, bank loans have not, in fact, been marketable. Yet, by the end of the 1980 's the amount of commercial and industrial loan sales outstanding had grown to over $250 billion from trivial amounts at the beginning of th e decade. To explain the opening of this loan sales market, we present a model of incentive-compatible loan sales that allows for implicit c ontractual features between loan sellers and loan buyers. We then test for the presence of these features using a sample of over 800 recent loan sales.