We study the role of risk transfer deals in an environment where banks can enhance the
value of their lending portfolios by engaging in costly monitoring/screening. We find that: i)
endogenous risk, that which can be controlled by monitoring, is retained. The exogenous
risk is transferred; ii) credit risk transfer (CRT) enhances banks' monitoring: It expands banks'
incentive based lending capacities and enhances credit availability; iii) CRT frees up
economic capital: at an equilibrium where banks' excess return on capital is positive CRT …