Imperfect information transmission from banks to investors: Macroeconomic implications

•We study banks’ screening effort assuming banks must sell their loans to investors.•Banks can signal their loan quality to investors only by buying error-prone ratings.•Strategic rating of bad loans reduces value of high ratings and weakens screening.•Conventional policies encourage strategic ratings, exacerbating the inefficiency.•A tax/subsidy scheme that distorts prices in asset markets can restore efficiency.