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The Impact of Liquidity Constraints on Bank Lending Policy

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  • Webb, David C

Abstract

This paper examines banks' provision of liquidity to depositors and provision of loans. The problem identified is that banks may not be able to provide new funds for borrowers who are short of cash, because either the return on investments is poor, or because depositors withdraw more funds than expected. Banks subject to liquidity shortages may ration loans to good borrowers. This problem is shown to depend upon the nature of the deposit contract and banks' inability to issue subordinated deposits. State contingent renegotiation of loans and matching of the duration of project returns and investment needs mitigates the problem.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 110 (2000)
Issue (Month): 460 (January)
Pages: 69-91

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Handle: RePEc:ecj:econjl:v:110:y:2000:i:460:p:69-91

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Cited by:
  1. Muradali V. Ibrahimo & Carlos P. Barros, 2009. "Unlearned Lessons from Risk, Debt Service, Bank Credit, and Asymmetric Information," Working Papers Department of Economics 2009/43, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  2. Berger, Allen N. & Bouwman, Christa H. S. & Kick, Thomas & Schaeck, Klaus, 2010. "Bank liquidity creation and risk taking during distress," Discussion Paper Series 2: Banking and Financial Studies 2010,05, Deutsche Bundesbank, Research Centre.
  3. Robin Boadway & Jean-Fran├žois Tremblay, 2003. "Public Economics and Startup Entrepreneurs," CESifo Working Paper Series 877, CESifo Group Munich.
  4. HAKIMI Abdelaziz & Ahmet DKHILI Hichem & KHLAIFIA Wafa, 2012. "Universal Banking and Credit Risk: Evidence from Tunisia," International Journal of Economics and Financial Issues, Econjournals, vol. 2(4), pages 496-504.

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