Credit rationing when banks are funding constrained

Credit crunches, such as in the recent financial crisis, generally occur when banks are themselves funding constrained. We use this observation to repair the workhorse Stiglitz–Weiss model of credit rationing. Recent research has invalidated the distributional assumption on which that model is based. This paper shows that by adding the assumption that banks are capacity constrained, Stiglitz–Weiss rationing can occur again. It discusses how this finding can be related to the current policy debates on bank funding and credit provision.

► Recent research undercut applicability of Stiglitz–Weiss model on technical issue.
► This paper shows how to correct for this, by adding one realistic assumption.
► Namely, that banks are funding constrained when rationing occurs.
► With capacity constrained competition, rationing equilibria re-emerge.
► Establishing a link between funding problems and constrained credit provision.