New Economics Papers
on Banking
Issue of 2013‒10‒02
twenty-six papers chosen by
Christian Calmès, Université du Québec en Outaouais

  1. Relationship and Transaction Lending in a Crisis By Patrick Bolton; Xavier Freixas; Leonardo Gambacorta; Paolo Emilio Mistrulli
  2. Female firms and banks’ lending behaviour: what happened during the great recession? By Francesca Maria Cesaroni; Francesca Lotti; Paolo Emilio Mistrulli
  3. Bank risk taking and competition: Evidence from regional banking markets By Kick, Thomas; Prieto, Esteban
  4. The procyclicality of foreign bank lending: evidence from the global financial crisis By Ugo Albertazzi; Margherita Bottero
  5. The value to banks of small business lending By Dmytro Holod; Joe Peek
  6. Banking crises, sudden stops, and the effectiveness of short-term lending By Chang, Chia-Ying
  7. Are banks forward-looking in their loan loss provisioning? Evidence from the Senior Loan Officer Opinion Survey (SLOOS) By Lakshmi Balasubramanyan; James B Thomson; Saeed Zaman
  8. Bank Leverage Shocks and the Macroeconomy: a New Look in a Data-Rich Environment By Jean-Stéphane Mésonnier; Dalibor Stevanovic
  9. Incentivizing Calculated Risk-Taking: Evidence from an Experiment with Commercial Bank Loan Officers By Shawn Cole; Martin Kanz; Leora Klapper
  10. Asymmetric Information and Imperfect Competition in the Loan Market By Crawfordy, Gregory S; Pavaniniz, Nicola; Schivardi, Fabiano
  11. Are female entrepreneurs better payers than men? By Daniele Coin
  12. Cascades in real interbank markets By Fariba Karimi; Matthias Raddant
  13. The impact of the sovereign debt crisis on bank lending rates in the euro area By Stefano Neri
  14. The role of banks in the transmission of monetary policy By Joe Peek; Eric S. Rosengren
  15. Regulating Consumer Financial Products: Evidence from Credit Cards By Sumit Agarwal; Souphala Chomsisengphet; Neale Mahoney; Johannes Stroebel
  16. On Keeping Your Powder Dry: Fiscal Foundations of Financial and Price Stability By Maurice Obstfeld
  17. Female entrepreneurs in trouble: do their bad loans last longer? By Juri Marcucci; Paolo Emilio Mistrulli
  18. Liquidity and credit risks in the UK’s financial crisis By Woon Wong; Iris Biefang-Frisancho Mariscal; Wanru Yao; Peter Howells
  19. A single composite financial stress indicator and its real impact in the euro area By Islami, Mevlud; Kurz-Kim, Jeong-Ryeol
  20. Testing for the Systemically Important Financial Institutions: a Conditional Approach By Sessi Tokpavi
  21. The Leverage Ratchet Effect By Anat R. Admati; Peter M. DeMarzo; Martin F. Hellwig; Paul Pfleiderer
  22. Cryptography and the economics of supervisory information: balancing transparency and confidentiality By Mark Flood; Jonathan Katz; Stephen J Ong; Adam Smith
  23. Reviewing the Leverage Cycle By Ana Fostel; John Geanakoplos
  24. Benchmarking financial systems : introducing the financial possibility frontier By Beck, Thorsten; Feyen, Erik
  25. Role of the Credit Risk Database in SME Financing (Japanese) By MAEHARA Yasuhiro
  26. Debt Rescheduling with Multiple Lenders: Relying on the Information of Others By Claude Fluet; Paolo G. Garella

  1. By: Patrick Bolton; Xavier Freixas; Leonardo Gambacorta; Paolo Emilio Mistrulli
    Abstract: We study how relationship lending and transaction lending vary over the business cycle. We develop a model in which relationship banks gather information on their borrowers, which allows them to provide loans for profitable firms during a crisis. Due to the services they provide, operating costs of relationship- banks are higher than those of transaction-banks. In our model, where relationship-banks compete with transaction-banks, a key result is that relationship-banks charge a higher intermediation spread in normal times, but offer continuation-lending at more favorable terms than transaction banks to profitable firms in a crisis. Using detailed credit register information for Italian banks before and after the Lehman Brothers' default, we are able to study how relationship and transaction-banks responded to the crisis and we test existing theories of relationship banking. Our empirical analysis confirms the basic prediction of the model that relationship banks charged a higher spread before the crisis, offered more favorable continuation-lending terms in response to the crisis, and suffered fewer defaults, thus confirming the informational advantage of relationship banking.
    JEL: G01 G21 G32
    Date: 2013–09
  2. By: Francesca Maria Cesaroni (University of Urbino “Carlo Bo”); Francesca Lotti (Bank of Italy); Paolo Emilio Mistrulli (Bank of Italy)
    Abstract: During the financial crisis banks faced liquidity shocks, and lending slowed down. The reduction in credit availability was due to demand- and supply-side factors. The decrease in turnover and investment led to a contraction of financial needs; on the other hand, the tightening of credit supply was the result of banks’ greater risk-aversion, difficulties in raising funds, and a worsening in the creditworthiness of borrowers. However, banks do not pass on liquidity shocks to borrowers according to a homogenous pattern: by following a pecking order, they first reduce lending to the marginal segment of borrowers to protect their core customers. Previous studies have shown that banks are less prone to lend to female firms than to others: lending to female firms may have suffered more during the crisis than other segments of the credit market. By using data from the Credit Register at the Bank of Italy for the period 2007-2009, we find that women-owned firms faced a more pronounced credit contraction with respect to other firms.
    Keywords: financial crisis, banks, loans, women-owned firms.
    JEL: J16 G21
    Date: 2013–06
  3. By: Kick, Thomas; Prieto, Esteban
    Abstract: This study investigates the bank competition-stability nexus using a unique regulatory dataset provided by the Deutsche Bundesbank over the period 1994 to 2010. First, we use outright bank defaults as the most direct measure of bank risk available and contrast the results to weaker forms of bank distress. Second, we control for a wide array of different time-varying characteristics of banks which are likely to influence the competition-risk taking channel. Third, we include different measures of competition, contestability and market power, each corresponding to a different contextual level of a bank's competitive environment. Our results indicate that political implications derived from empirical banking market studies must recognize the theoretical properties of the indicators for market power and competition. Using the Lerner Index as a proxy for bank-specific market power, our results support the view that market power tends to reduce banks' default probability. In contrast, using the Boone Indicator (derived on the state level) and/or the regional branch share as a measure of competition, we find strong support that increased competition lowers the riskiness of banks. --
    Keywords: bank risk,bank competition,instrumental variables models
    JEL: C35 G21 G32 L50
    Date: 2013
  4. By: Ugo Albertazzi (Bank of Italy); Margherita Bottero (Bank of Italy)
    Abstract: We exploit highly disaggregated bank-firm data to investigate the dynamics of foreign vs. domestic credit supply in Italy around the period of the Lehman collapse, which brought a sudden and unexpected deterioration of economic conditions and a sharp increase in credit risk. Taking advantage of the presence of multiple lending relationships to control for credit demand and risk at the individual-firm level, we show that foreign lenders restricted credit supply (to the same firm) more sharply than their domestic counterparts. Based on a number of exercises testing alternative explanations for such procyclicality, we find that it mainly reflects the (functional) distance between a foreign bank’s headquarters and the Italian credit market.
    Keywords: foreign banks, credit crunch, bank balance sheet channel, functional distance
    JEL: E44 G15 G14 G21
    Date: 2013–07
  5. By: Dmytro Holod; Joe Peek
    Abstract: By estimating the market premium placed on the small business loan portfolios of banking organizations, this study provides direct evidence on the value to banks arising from relationship lending. Using data from the small business loan survey contained in the June bank call reports, we find that small commercial and industrial loans do, in fact, add value for smaller banking organizations, both in absolute terms and relative to the value contributed by larger commercial and industrial loans. Interestingly, the value-enhancing effect emanates primarily from the smallest loans, those with original values of $100,000 or less. On the other hand, small commercial real estate loans, being transactional rather than relationship in nature, do not contribute additional value to banking organizations relative to larger commercial real estate loans.
    Keywords: Bank loans ; Small business - Finance
    Date: 2013
  6. By: Chang, Chia-Ying
    Abstract: This paper sheds light on the linkages between banking crises and sudden stops and discusses the effectiveness of short-run lending in their prevention. It develops an overlapping generations framework and incorporates the possibilities of bank runs and moral hazard of financial intermediaries. Consequently, I find that the strategy to overcome liquidity problems could worsen banks’ positions and cause bank runs and sudden stops. A small liquidity shock may still lead to a banking crisis through the depositors’ expectation. A large shock would require short-run lending to prevent an immediate bank run, but the repayment obligation may worsen moral hazard problems.
    Keywords: Banking crises, Sudden stops, Moral hazard, Short-run lending, Capital flows,
    Date: 2013
  7. By: Lakshmi Balasubramanyan; James B Thomson; Saeed Zaman
    Abstract: The purpose of this study is to empirically analyze if loan loss provisioning is forward-looking. Using a confidential dataset that directly helps us identify loan demand and loan supply at the bank level, we test if the banks’ provisioning behavior is different before and after the crisis. We find, for the entire sample of banks, loan loss provisioning is forward-looking and statistically significant in the post-crisis period. Our results show that the top quartiles of banks in our dataset exhibit a forward-looking approach to loan loss provisioning both in the pre- and post-crisis period. From a policy perspective, the top quartile of banks in our sample is engaged in forward-looking loan loss provisioning. From an accounting stance, this may be suggestive of the largest banks being more engaged in earnings management and income smoothing than the smallest banks in our sample. However, from the banking regulation perspective, implementing forwardlooking loan loss provisioning is economically intuitive and will help build a countercyclical buffer, thereby strengthening bank balance sheets.
    Keywords: Bank loans
    Date: 2013
  8. By: Jean-Stéphane Mésonnier; Dalibor Stevanovic
    Abstract: The recent crisis has revealed the potentially dramatic consequences of allowing the build-up of an overstretched leverage of the financial system, and prompted proposals by bank supervisors to significantly tighten bank capital requirements as part of the new Basel 3 regulations. Although these proposals have been fiercely debated ever since, the empirical question of the macroeconomic consequences of shocks to banks’ leverage, be they policy induced or not, remains still largely unsettled. In this paper, we aim to overcome some longstanding identification issues hampering such assessments and propose a new approach based on a data-rich environment at both the micro (bank) level and the macro level, using a combination of bank panel regressions and macroeconomic factor models. We first identify bank leverage shocks at the micro level and aggregate them to an economy-wide measure. We then compute impulse responses of a large array of macroeconomic indicators to our aggregate bank leverage shock, using the new methodology developed by Ng and Stevanovic (2012). We find significant and robust evidence of a contractionary impact of an unexpected shock reducing the leverage of large banks.
    Keywords: Bank capital ratios, macroeconomic fluctuations, panel, dynamic factor models
    JEL: C23 C38 E32 E51 G21 G32
    Date: 2013
  9. By: Shawn Cole; Martin Kanz; Leora Klapper
    Abstract: We use an experiment with commercial bank loan officers to test how performance based compensation affects risk-assessment and lending. High-powered incentives lead to greater screening effort and more profitable lending decisions. This effect, however, is muted by deferred compensation and limited liability, two standard features of loan officer incentive contracts. We find that career concerns and personality traits affect screening behavior, but show that the response to monetary incentives does not vary with traits such as risk-aversion, optimism or overconfidence. Finally, we present evidence that incentive contracts distort the assessment of credit risk, even among trained professionals with many years of experience. Loans evaluated under permissive incentives are rated significantly less risky than the same loans evaluated under pay-for-performance.
    JEL: D03 G21 J33
    Date: 2013–09
  10. By: Crawfordy, Gregory S (University of Zurich, CEPR and CAGE); Pavaniniz, Nicola (zUniversity of Zurich); Schivardi, Fabiano (xLUISS, EIEF and CEPR)
    Abstract: We measure the consequences of asymmetric information in the Italian market for small business lines of credit. Exploiting detailed, proprietary data on a random sample of Italian firms, the population of medium and large Italian banks, individual lines of credit between them, and subsequent individual defaults, we estimate models of demand for credit, loan pricing, loan use, and firm default based on the seminal work of Stiglitz and Weiss (1981) to measure the extent and consequences of asymmetric information in this market. While our data include a measure of observable credit risk comparable to that available to a bank during the application process, we allow firms to have private information about the underlying riskiness of their project. This riskiness influences banks’ pricing of loans as higher interest rates attract a riskier pool of borrowers, increasing aggregate default probabilities. Data on default, loan size, demand, and pricing separately identify the distribution of private riskiness from heterogeneous firm disutility from paying interest. Preliminary results suggest evidence of asymmetric information, separately identifying adverse selection and moral hazard. We use our results to quantify the impact of asymmetric information on pricing and welfare, and the role imperfect competition plays in mediating these effects.
    Keywords: Italian, asymmetric information
    Date: 2013
  11. By: Daniele Coin (Bank of Italy)
    Abstract: In this article we test whether Italian female entrepreneurs are more reliable payers than men, by carrying out a survival analysis of micro enterprises that utilize a credit for the first time in the period January 2005 to December 2008, and monitoring the quality of their exposure until December 2010. The data were drawn from the Bank of Italy’s Central Credit Register, which provides information on the entire Italian population that has loans with the Italian banking system. We observed that female entrepreneurs are better payers than their male counterparts only because women tend to undertake activities in less risky sectors. Our analysis could also be considered as an indirect measure of whether female entrepreneurs experience discrimination when accessing the Italian credit market.
    Keywords: small business credit, lending discrimination
    JEL: G21 J71
    Date: 2013–06
  12. By: Fariba Karimi; Matthias Raddant
    Abstract: We analyze cascades of defaults in an interbank loan market. The novel feature of this study is that the network structure and the size distribution of banks are derived from empirical data. We find that the ability of a defaulted institution to start a cascade depends on an interplay of shock size and connectivity. Further results indicate that the ability to limit default risk by spreading the lending to many counterparts decreased with the financial crisis. To evaluate the influence of the network structure on market stability, we compare the simulated cascades from the empirical network with results from different randomized network models. The results show that the empirical network has non-random features, which cannot be captured by rewired networks. The analysis also reveals that simulations assuming homogeneity for the size of banks and loan contracts dramatically overestimates the fragility of the interbank market
    Keywords: interbank loan Networks, systemic risk, cascades, null models
    JEL: G17 G01 E47 C15
    Date: 2013–09
  13. By: Stefano Neri (Banca d'Italia)
    Abstract: Since the early part of 2010 tensions in the sovereign debt markets of some euro-area countries have progressively distorted monetary and credit conditions, hindering the ECB monetary policy transmission mechanism and raising the cost of loans to non-financial corporations and households. This paper makes an empirical assessment of the impact of the tensions on bank lending rates in the main euro-area countries, concluding that they have had a significant impact on the cost of credit in the peripheral countries. A counterfactual exercise indicates that if the spreads had remained constant at the average levels recorded in April 2010, the interest rates on new loans to non-financial corporations and on residential mortgage loans to households in the peripheral countries would have been, on average, lower by 130 and 60 basis points, respectively, at the end of 2011. These results are robust to alternative measures of the cost of credit and econometric techniques.
    Keywords: sovereign debt crisis, bank lending rates, seemingly unrelated regression
    JEL: C32 E43 G21
    Date: 2013–06
  14. By: Joe Peek; Eric S. Rosengren
    Abstract: The transmission of monetary policy, especially in light of recent events, has received increased attention, especially with respect to the efficacy of the bank lending channel. This paper summarizes the issues associated with isolating the bank lending channel and determining the extent to which it is operational. Evidence on the effectiveness of the bank lending channel is presented, both in the United States and abroad. The paper then provides observations about the likely consequences for the effectiveness of the lending channel of the changes in the financial environment associated with the recent financial crisis.
    Keywords: Monetary policy ; Global financial crisis ; Banks and banking - Regulations
    Date: 2013
  15. By: Sumit Agarwal; Souphala Chomsisengphet; Neale Mahoney; Johannes Stroebel
    Abstract: We analyze the effectiveness of consumer financial regulation by considering the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act in the United States. Using a unique panel data set covering over 150 million credit card accounts, we find that regulatory limits on credit card fees reduced overall borrowing costs to consumers by an annualized 2.8% of average daily balances, with a decline of more than 10% for consumers with the lowest FICO scores. Consistent with a model of low fee salience and limited market competition, we find no evidence of an offsetting increase in interest charges or a reduction in access to credit. Taken together, we estimate that the CARD Act fee reductions have saved U.S. consumers $20.8 billion per year. We also analyze the CARD Act requirement to disclose the interest savings from paying off balances in 36 months rather than only making minimum payments. We find that this "nudge" increased the number of account holders making the 36-month payment value by 0.5 percentage points, with a similarly sized decrease in the number of account holders paying less than this amount.
    JEL: D0 D14 G0 G02 G21 G28 L0 L13 L15
    Date: 2013–09
  16. By: Maurice Obstfeld (University of California, Berkeley, CEPR, and NBER (E-mail:
    Abstract: Banking systems have rapidly grown to a point where for many countries bank assets amount to multiples of GDP. As a consequence, governmentfs capacity to provide stability-enhancing fiscal guarantees against systemic crises can no longer be taken for granted. As regulation of dynamic financial markets will inevitably be imperfect, prudent governments need to adjust other facets of macroeconomic policy in order to mitigate financial instability. A precautionary approach to fiscal policy, leading to moderate levels of public debt relative to GDP over the medium term, is essential for the credibility of government promises to support the financial system, as well as the broader economy.
    Keywords: Fiscal policy, Financial stability, Monetary policy, Financial crisis, Banking crisis, Bank resolution
    JEL: E44 E58 E63 G15 G28
    Date: 2013–09
  17. By: Juri Marcucci (Bank of Italy); Paolo Emilio Mistrulli (Bank of Italy)
    Abstract: We investigate the duration of bad loans for a unique data set of sole proprietorships in Italy, finding that bad loans for female firms last longer. However, this result is mainly due to the fact that loans granted to female firms are less frequently written off than those to male ones, suggesting that for banks female firms might be more creditworthy than male firms. These findings are robust to censoring, alternative specifications of the distribution of bad loan duration and other bank-specific control variables.
    Keywords: duration of bad loans, default status, survival analysis
    JEL: C41 G21 G33
    Date: 2013–06
  18. By: Woon Wong (University of the West of England, Bristol); Iris Biefang-Frisancho Mariscal (University of the West of England, Bristol); Wanru Yao (University of the West of England, Bristol); Peter Howells (University of the West of England, Bristol)
    Abstract: This paper investigates the relationship between credit risk and liquidity components in the interbank spread and how this relationship unfolded during the recent financial crisis. We find that prior to the central bank’s Bank of England’s intervention counterpart risk was a major factor in the widening of the spread and also caused a rise in liquidity risk. However, this relationship was reversed after central bank started quantitative easing (QE). Using the accumulated value of asset purchases as a proxy for central bank’s liquidity provisions, we provide evidence that the QE operations were successful in reducing liquidity premia and ultimately, indirectly, credit risk.
    Keywords: interbank spreads, liquidity premia, credit risk, quantitative easing, financial crisis
  19. By: Islami, Mevlud; Kurz-Kim, Jeong-Ryeol
    Abstract: In this paper, we construct a single composite financial stress indicator (FSI) which aims to predict developments in the real economy in the euro area. Our FSI was shown to perform better than the Euro STOXX 50 volatility index for the recent banking crisis and the euro-area sovereign debt crisis and to be able to serve as an early warning indicator for negative impacts of financial stress on the real economy. --
    Keywords: financial stress indicator,predictability,financial crisis,real economy
    JEL: C12 G01
    Date: 2013
  20. By: Sessi Tokpavi
    Abstract: We introduce in this paper a testing approach that allows checking whether two financial institutions are systemically equivalent, with systemic risk measured by CoVaR (Adrian and Brunnermeier, 2011). The test compares the difference in CoVaR forecasts for two financial institutions via a suitable loss function that has an economic content. Our testing approach differs from those in the literature in the sense that it is conditional, and helps evaluating in a forward-looking manner, the extent to which statistically significant differences in CoVaR forecasts can be attributed to lag values of market state variables. Moreover, the test can be used to identify systemically important financial institutions (SIFIs). Extensive Monte Carlo simulations show that the test has desirable small sample properties. With an application on a sample including 70 large U.S. financial institutions, our conditional test using market state variables such as VIX and various yield spreads, reveals more (resp. less) heterogeneity in the systemic profiles of these institutions compared to its unconditional version, in crisis (resp. non-crisis) period. It also emerges that the systemic ranking provided by our testing approach is a good forecast of a financial institution's sensitivity to a crisis. This is in contrast to the ranking obtained directly using CoVaR forecasts which has less predictive power because of estimation uncertainty.
    Keywords: Systemic Risk, SIFIs, CoVaR, Estimation Uncertainty, Conditional Predictive Ability Test.
    JEL: G32 C53 C58
    Date: 2013
  21. By: Anat R. Admati (Graduate School of Business, Stanford University); Peter M. DeMarzo (Graduate School of Business, Stanford University); Martin F. Hellwig (Max Planck Institute for Research on Collective Goods); Paul Pfleiderer (Graduate School of Business, Stanford University)
    Abstract: Shareholder-creditor conflicts can create leverage ratchet effects, resulting in inefficient capital structures. Once debt is in place, shareholders may inefficiently increase leverage but avoid reducing it no matter how beneficial leverage reduction might be to total firm value. We present conditions for an irrelevance result under which shareholders view asset sales, pure recapitalization and asset expansion with new equity as equally undesirable. We then analyze how seniority, asset heterogeneity, and asymmetric information affect shareholders’ choice of leverage-reduction method. Our results are particularly relevant to banking and highlight the benefit and importance of capital regulation to constrain inefficient excessive borrowing.
    Date: 2013–08
  22. By: Mark Flood; Jonathan Katz; Stephen J Ong; Adam Smith
    Abstract: We elucidate the tradeoffs between transparency and confidentiality in the context of financial regulation. The structure of information in financial contexts creates incentives with a pervasive effect on financial institutions and their relationships. This includes supervisory institutions, which must balance the opposing forces of confidentiality and transparency that arise from their examination and disclosure duties. Prudential supervision can expose confidential information to examiners who have a duty to protect it. Disclosure policies work to reduce information asymmetries, empowering investors and fostering market discipline. The resulting confidentiality/transparency dichotomy tends to push supervisory information policies to one extreme or the other. We argue that there are important intermediate cases in which limited information sharing would be welfare-improving, and that this can be achieved with careful use of new techniques from the fields of secure computation and statistical data privacy. We provide a broad overview of these new technologies. We also describe three specific usage scenarios where such beneficial solutions might be implemented.
    Date: 2013
  23. By: Ana Fostel (Dept. of Economics, George Washington University); John Geanakoplos (Cowles Foundation, Yale University)
    Abstract: We review the theory of leverage developed in collateral equilibrium models with incomplete markets. We explain how leverage tends to boost asset prices, and create bubbles. We show how leverage can be endogenously determined in equilibrium, and how it depends on volatility. We describe the dynamic feedback properties of leverage, volatility, and asset prices, in what we call the Leverage Cycle. We also describe some cross-sectional implications of multiple leverage cycles, including contagion, flight to collateral, and swings in the issuance volume of the highest quality debt. We explain the differences between the leverage cycle and the credit cycle literature. Finally, we describe an agent based model of the leverage cycle in which asset prices display clustered volatility and fat tails even though all the shocks are essentially Gaussian.
    Keywords: Leverage, Leverage cycle, Volatility, Collateral equilibrium, Collateral value, Liquidity wedge, Flight to collateral, Contagion, Adverse selection, Agent based models
    JEL: E32 E44 G01 G12 G14 G15
    Date: 2013–09
  24. By: Beck, Thorsten; Feyen, Erik
    Abstract: Across the world, supply for financial services rarely matches the demand, given multiple market frictions. This paper discusses the concept of the financial possibilities frontier as a constrained optimum to categorize different problems of shallow financial markets or unsustainable expansion. The paper offers three examples of how to use different data sources to apply the frontier concept to assess the state of financial systems.
    Keywords: Debt Markets,Access to Finance,Banks&Banking Reform,Emerging Markets,Economic Theory&Research
    Date: 2013–09–01
  25. By: MAEHARA Yasuhiro
    Abstract: Asymmetric information makes it difficult for small and medium enterprises (SMEs) to raise funds. In order to reduce the asymmetry of information, a framework for sharing credit risk information will be useful. Currently, sharing credit risk information on individual SMEs has been made available by credit bureaus and credit-rating firms. However, in the future, such information will not be adequate for achieving more diversified and efficient relationship and transaction-based lending. It is necessary to establish a common benchmark in the form of a credit risk index of average SMEs based on a large-scale credit risk database. Because such a credit risk database would be a public good in the information infrastructure, collaboration between the private and public sectors would be desirable.
    Date: 2013–09
  26. By: Claude Fluet; Paolo G. Garella
    Abstract: Can debt rescheduling decisions differ in multiple lenders’ versus a single lender loan? Do multiple lenders efficiently react to information? We show that the precision of information plays an essential role. Foreclosing by one lender is disruptive so that a lender can rationally wait for the decision of other lenders, rescheduling her loan, if she expects that other lenders receive more precise information. We develop a Bayesian game where signals of different precision are randomly distributed to lenders. Both, premature liquidation and excessive rescheduling are possible in equilibrium, according to the pattern of information. However this is a second-best outcome, given that private information cannot be optimally shared.
    Keywords: Overlending, debt contracts, insolvency, illiquidity, liquidation, relationship lending, multiple lenders, Bayesian games
    JEL: G32 G33 D82 D86
    Date: 2013

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