The Journal of Finance

Loan Sales and the Cost of Bank Capital

Published: 06/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb03945.x

GEORGE G. PENNACCHI

This paper considers a model where banks may improve the returns on loans by monitoring borrowers. Bank regulation, together with competitive deposit and equity financing, can give banks an incentive to sell loans, but the extent of their loan selling is limited by a moral‐hazard problem. A solution is given for the optimal design of the bank‐loan buyer contract that alleviates this moral‐hazard problem. An explanation is also given as to why some banks might buy loans and why loan sales volume has recently increased.

Financial Intermediaries and Liquidity Creation

Published: 03/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb05080.x

GARY GORTON, GEORGE PENNACCHI

Trading losses associated with information asymmetries can be mitigated by designing securities which split the cash flows of underlying assets. These securities, which can arise endogenously, have values that do not depend on the information known only to informed agents. Bank debt (deposits) is an example of this type of liquid security which protect relatively uninformed agents, and we provide a rationale for deposit insurance in this content. High‐grade corporate debt and government bonds are other examples, implying that a money market mutual fund‐based payments system may be an alternative to one based on insured bank deposits.

On Equilibrium When Contingent Capital Has a Market Trigger: A Correction to Sundaresan and Wang Journal of Finance (2015)

Published: 02/18/2019   |   DOI: 10.1111/jofi.12762

GEORGE PENNACCHI, ALEXEI TCHISTYI

This paper identifies an error in Sundaresan and Wang (2015, hereafter SW) that invalidates its Theorem 1. The paper develops a model of contingent capital (CC) with a stock price trigger that is consistent with SW's framework and yields closed‐form solutions for stock and CC prices. Yet, the model shows that unique stock price equilibria exist for a broader range of CC contractual terms than those required by SW. Specifically, when conversion terms benefit CC investors and penalize shareholders, a unique equilibrium can exist rather than the multiple equilibria stated in SW.

Bank Deposit Rate Clustering: Theory and Empirical Evidence

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00185

Charles Kahn, George Pennacchi, Ben Sopranzetti

Like security prices, retail deposit interest rates cluster around integers and “even” fractions. However, explanations for security price clustering are incompatible with deposit rate clustering. A theory based on the limited recall of retail depositors is proposed. It predicts that banks tend to set rates at integers and that rates are “sticky” at these levels. The propensity for integer rates increases with the level of wholesale interest rates and deposit market concentration. When banks set noninteger rates, rates are more likely to be just above, rather than just below, integers. The paper finds substantial empirical support for the theory's implications.

Corporate Taxes and Securitization

Published: 03/27/2014   |   DOI: 10.1111/jofi.12157

JOONGHO HAN, KWANGWOO PARK, GEORGE PENNACCHI

Most banks pay corporate income taxes, but securitization vehicles do not. Our model shows that, when a bank faces strong loan demand but limited deposit market power, this tax asymmetry creates an incentive to sell loans despite less‐efficient screening and monitoring of sold loans. Moreover, loan‐selling increases as a bank's corporate income tax rate and capital requirement rise. Our empirical tests show that U.S. commercial banks sell more of their mortgages when they operate in states that impose higher corporate income taxes. A policy implication is that tax‐induced loan‐selling will rise if banks’ required equity capital increases.