Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
986762 | Review of Financial Economics | 2008 | 19 Pages |
Abstract
A simple model of lending with endogenous screening predicts that risk-neutral banks tend to adopt tighter lending standards under several conditions commonly seen in recessions: lower interest rates (or spreads), higher default rates, or a smaller fraction of good borrowers. Historical data support these predictions. In addition, better information about borrower types encourages tighter lending standards, and competition in laxity can arise with multiple banks. Within the class of symmetric screening decisions, endogenizing the interest rates disrupts the existence of equilibrium in pure strategies, just as when screening decisions are assumed to be exogenous.
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Authors
Sherrill Shaffer, Scott Hoover,