Loan sales lead to excessive monitoring of risky credits, impacting lending efficiency.
Debt markets impact lending efficiency. Banks can transfer credit risk by selling loans or buying credit default swaps (CDS). CDSs are better for riskier credits, while loan sales are better for safer credits. Monitoring is excessive for riskier credits and insufficient for safer ones. CDSs can dominate loan sales for safer credits, supporting better monitoring and efficient risk sharing. Restrictions on loan sales increase the use of CDSs and lead to low monitoring.