Multi-Bank Loan Pool Contracts

Posted: 6 Aug 2008

See all articles by Andreas Gintschel

Andreas Gintschel

JPMorgan

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE

Date Written: November 2003

Abstract

We show that multi-bank loan pools improve the risk-return profile of regional banks' loan business. Banks write simple contracts on the proceeds from pooled loan portfolios, taking into account the agency problems in joint loan production. Thereby, banks benefit from diversifying credit risk while limiting the efficiency loss due to adverse incentives. We present empirical evidence that the formation of loan pools can reduce the volatility in default rates, proxying for credit risk, of participating banks' loan portfolios by roughly 70% in our sample. Under reasonable assumptions, the gain in return on equity (in certainty equivalent terms) is around 20 basis points annually.

Suggested Citation

Gintschel, Andreas and Hackethal, Andreas, Multi-Bank Loan Pool Contracts (November 2003). Available at SSRN: https://ssrn.com/abstract=493362 or http://dx.doi.org/10.2139/ssrn.493362

Andreas Gintschel

JPMorgan ( email )

Junghofstrasse 14
Frankfurt, 60311
Germany
+49 69 7124 2195 (Phone)

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno Platz 3
Frankfurt am Main, 60323
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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