FIN 701 Lecture Notes - Lecture 6: Loan Sale, Shadow Banking System, Credit Risk
13 Apr 2016
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Old-style banking: assets are booked and held to maturity; originate to hold". Credit risk concentrated on the balance sheet of banks. Some mechanisms to control credit risk: higher spreads & fees for riskier borrowers, rationing loans to risky borrowers o. Enhanced collateral/seniority for riskier loans: diversifying across borrowers, restrictive covenants in loan agreements; e. g. restrictions on dividends, additional debt issues, times interest. Leads to originate to distribute", moral hazard, reduced incentive to monitor, distribution of credit risk in the market, shadow banking. Loan sale: loan sold from one fi to another fi or corporation o o. Loan originated to be syndicated to other fis: regulator views it as not a public distribution of a security; therefore, regulatory supervision not required, no new security created. o. Since 2008, us fdic large seller of loans from failed banks (www. fdic. gov) May be sold with or without recourse. Traditional short term: hlt loan sales o.
