Why commercial banks sell loans: an empirical analysis

Banks are increasingly selling loans, either outright, through participations and syndications, or through "securitization. " 1 Loan sales are not a new phenomenon. Commercial loan participations and overlines are quite common, but there is some evidence that commercial loan sales are increasing. In 1984, commercial banks sold roughly $148 billion of loans. By 1985, loan sales by commercial banks jumped nearly 75 percent to $258 billion. Sales of other types of loans are also picking up. The market for mortgage-backed securities has mushroomed from a $500-billion industry in 1981 to a $2-trillion industry in 1985. 2 In addition, in the last year or so, the market for "securitized" consumer installment loans has been expanding. Packages of auto loans and credit card receivables are increasingly being sold to third-party investors. In 1985, for example, only about $1 billion of auto loans were securitized, but in 1986, $10 billion were sold under this method. 3 Several reasons for asset sales have been suggested. Asset sales may allow a bank to avoid "regulatory taxes," i.e., reserve requirements, capital requirements, and deposit insurance premiums. Also asset sales may facilitate gap management and enhance a bank's liquidity and diversification. This paper attempts to explain why banks sell loans by estimating two logit models to determine the probability that an institution will sell loans and by estimating a tobit model to determine the dollar amount of loans that the bank will sell annually. The driving forces behind asset sales are important for the regulation of depository institutions. For example, if the avoidance of regulatory taxes is the driving force behind asset sales, then such "taxes" may be set too high, thus possibly driving high quality loans off banks' books. In that case, regulatory taxes should be lowered, rather than raised, in order to reduce the incentives for banks to sell high quality loans, or regulators should concentrate on both asset composition and asset quality by risk-adjusting capital requirements and deposit insurance premiums. If, however, asset sales are primarily influenced by other factors, such as liquidity and diversification, then perhaps asset sales should be encouraged in order to improve the soundness of the banking system. To the authors' knowledge, no empirical or theoretical work on bank loan sales has been published to date. However, other feegenerating, off-balance-sheet activities of banks have been studied. For example, Giddy (1985) argues that capital requirements encourage banks to engage in off-balance-sheet banking. Empirical work in this area is rather limited. Koppenhaver (1986) estimates models to determine the key factors involved in a bank's decision to engage in loan commitments, standby letters of credit, and commercial letters of credit. He finds that such decisions are related to bank quality, regulatory taxes (especially reserve requirements), and customer demand. In this paper, we find that regulatory taxes have an important impact on loan sales, but a bank's comparative advantage in originating and servicing loans and its level of diversification are the primary factors affecting loan sales by commercial banks. The first section discusses the theory behind asset sales. The second and third sections present and discuss a model for predicting whether a firm would sell assets throughout the year, sometimes during a year, or never. The fourth section presents a model to explain the dollar amount of assets that a firm would sell. Finally, the fifth section discusses conclusions and policy implications.