The Opening of New Markets for Bank Assets

Abstract

When a corporation seeks to raise resources, it can issue securities such as bonds or equities, or alternatively, it can borrow from a bank. These two methods of raising capital are not identical. Empirical evidence suggests that a bank loan is significantly different from a marketable security. ¹ A key implication of theories explaining the uniqueness of bank lending is that bank loans should not be resold once originated by banks. Bank loans are assumed to be difficult to value by investors, and therefore, should be nonmarketable. The illiquidity of bank loans underlies the rationale for bank regulation and deposit insurance because, historically, the absence of information-revealing markets for these securities led to banking panics. ² In fact, one might say that if banks were able to sell loans, it would be the end of banking. (Possibly bank regulation would also end.)