Law of international finance

 Sub loan structure vs. other forms of loan sales

During a recession, banks generally fail because they become victims of wildly fluctuating market interest rates vis a vis regulated bank interest rates. De-regulation has not been successful either, in preventing the credit crunches that often force banks to shrink their balance sheets primarily by reducing loans, in order to satisfy capital to asset ratios that are determined by regulators (Rosengren and Simons, 1992). Banks with a high percentage of bad debts or non performing loans will be faced with a poor rating ascribed to them by financial institutions, which affects a bank’s ability to attract more capital and thereby results in an increase in the cost of funds (, n.d.). When a bank is faced with the prospect of shrinking its loan base, it must consider selling off all or part of its loan assets in order to improve its liquidity position.  Three principal methods are used by UK banks to sell their loan assets: (a) novation (b) assignment and (c) sub participation.
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