Ch 25 2012 - 1 Chapter 25 Loan Sales 2 Overview This...

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Chapter 25 Loan Sales 1
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Overview This chapter discusses the growing role of loan sales, which can be used to address the control of credit risk and liquidity risk of FIs. The use of loan sales is not new and may involve foreign loans. With the development of secondary markets for many types of loans, loan sales are employed even by relatively small FIs. 2
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Loan Sales versus Loan Securitization Loan Securitization: The packaging and selling of loans backed by securities. Mostly mortgages, consumer loans, and other types of loans that are similar to each other. Loan Sales: The selling of individual loans. It breaks the traditional idea of relationship lending which the originating bank closely monitors the borrower. Can sell all (assignment) or part of a loan (participation). 3
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2 Types of Loan Sales Contracts Participations (part of the loan is sold, relationship is maintained between the bank and the borrower). Risk and monitoring costs are shared between the buyer and seller of the loan. Assignments (whole loan is sold, relationship is essentially discontinued) Form bulk of the market (90% +). All rights transferred on sale of loan. 4
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Recent Crisis Loan sales markets largely froze up. It is one reason why balance sheet commercial & industrial loans did not decline all that much during the recent crisis. Loans that otherwise would have been sold clogged up the balance sheets of banks. These loans remained on the balance sheet and therefore understated the reduction in new lending. 5
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Bank Loan Sales Market May be sold with or without recourse. With recourse means that the buyer has the ability to sell the loan back to the originator if the loan deteriorates, or the seller takes the first tranche of losses.
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Ch 25 2012 - 1 Chapter 25 Loan Sales 2 Overview This...

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