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Bank lending opportunities and credit standards

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  • Güner, A. Burak
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    Abstract

    This article empirically tests the hypothesis that credit-screening standards can be first increasing and then decreasing in the quality of the bank's pool of potential borrowers, which in turn may vary through the business cycle or across different segments of the lending markets. A key implication is that banks with lending opportunities toward the middle of the quality spectrum can have loan portfolios that perform better than do the portfolios of banks with loan-origination opportunities that are either too weak or too strong. Using banks' volume of secondary-market loan sales as a proxy for the richness of lending opportunities, I find an inverse U-shaped relation between the performance of banks' loan portfolios and their activity in the loan sales market. The pattern deserves scrutiny for its policy implications, as many regulators hold the view that countercyclical variation in credit standards may have a destabilizing effect on business cycles.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Stability.

    Volume (Year): 4 (2008)
    Issue (Month): 1 (April)
    Pages: 62-87

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    Handle: RePEc:eee:finsta:v:4:y:2008:i:1:p:62-87

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    Web page: http://www.elsevier.com/locate/jfstabil

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    References

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    1. Joseph G. Haubrich & James B. Thomson & Raghuram G. Rajan & ary, 1993. "Loan sales, implicit contracts, and bank structure," Proceedings 416, Federal Reserve Bank of Chicago.
    2. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    3. Demsetz, Rebecca S, 2000. "Bank Loan Sales: A New Look at the Motivations for Secondary Market Activity," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 23(2), pages 197-222, Summer.
    4. James, Christopher, 1988. "The use of loan sales and standby letters of credit by commercial banks," Journal of Monetary Economics, Elsevier, vol. 22(3), pages 395-422.
    5. Rebecca Demsetz, 1993. "Recent trends in commercial bank loan sales," Quarterly Review, Federal Reserve Bank of New York, issue Win, pages 75-78.
    6. Gary B. Gorton & Joseph G. Haubrich, . "The Loan Sales Market," Rodney L. White Center for Financial Research Working Papers 35-88, Wharton School Rodney L. White Center for Financial Research.
    7. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1993. "The Choice Between Public and Private Debt: An Analysis of Post-Deregulation Corporate Financing in Japan," NBER Working Papers 4421, National Bureau of Economic Research, Inc.
    8. Sandeep Dahiya & Manju Puri & Anthony Saunders, 2003. "Bank Borrowers and Loan Sales: New Evidence on the Uniqueness of Bank Loans," The Journal of Business, University of Chicago Press, vol. 76(4), pages 563-582, October.
    9. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
    10. Dennis, Steven A. & Mullineaux, Donald J., 2000. "Syndicated Loans," Journal of Financial Intermediation, Elsevier, vol. 9(4), pages 404-426, October.
    11. Gorton, Gary & Winton, Andrew, 2003. "Financial intermediation," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 8, pages 431-552 Elsevier.
    12. Berlin, Mitchell & Loeys, Jan, 1988. " Bond Covenants and Delegated Monitoring," Journal of Finance, American Finance Association, vol. 43(2), pages 397-412, June.
    13. George Pennacchi, . "Loan Sales and the Cost of Bank Capital," Rodney L. White Center for Financial Research Working Papers 07-87, Wharton School Rodney L. White Center for Financial Research.
    14. Philip E. Strahan, 1999. "Borrower risk and the price and nonprice terms of bank loans," Staff Reports 90, Federal Reserve Bank of New York.
    15. Carlstrom, Charles T. & Samolyk, Katherine A., 1995. "Loan sales as a response to market-based capital constraints," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 627-646, June.
    16. Steven Drucker & Manju Puri, 2005. "On the Benefits of Concurrent Lending and Underwriting," Journal of Finance, American Finance Association, vol. 60(6), pages 2763-2799, December.
    17. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
    18. Martin Ruckes, 2004. "Bank Competition and Credit Standards," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 1073-1102.
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    Cited by:
    1. Black, Lamont K. & Hazelwood, Lieu N., 2013. "The effect of TARP on bank risk-taking," Journal of Financial Stability, Elsevier, vol. 9(4), pages 790-803.

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