Are banks still special when there is a secondary market for loans?

It is commonly argued that banks play a special role in the financial system because they resolve an important information asymmetry. The recent development of an active secondary market for loans could however potentially diminish this special role. This study utilizes a unique dataset of secondary market loan prices to examine this issue. We find that new loan announcements are associated with a positive stock price announcement effect even when a borrower’s loans trade on the secondary market. This result also holds true for distressed borrowers who are ex ante expected to be most adversely affected by a potential reduction in bank incentives to monitor as a result of a secondary market for loans. Moreover, when a borrower’s existing loans trade for the first time in the secondary loan market, it elicits a positive stock price response. Overall, our results suggest that banks continue to be special in the presence of a secondary market for bank loans, and that the bank monitoring function and the secondary market for bank loans are complementary sources of information about borrowers. This implies that banks and markets can co-exist as information producers. JEL Classification Codes: G14, G21, G22, G23, G24