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An economic rationale for the pricing structure of bank loan commitments

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  • Thakor, Anjan V.
  • Udell, Gregory F.

Abstract

An economic rationale is provided for the competitive equilibrium deployment of commitment and usage fees in loan commitment pricing. It is shown that, under perfect information, assessing both fees rather than just one permits optimal risk sharing. When the borrower is privately informed about its probability of future commitment utilization, commitment and usage fees can be used to induce borrowers to identify themselves by self-selection through contract choice. The equilibrium characterized here is dissipative and thus raises the usual existence questions which are addressed in the paper.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 11 (1987)
Issue (Month): 2 (June)
Pages: 271-289

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Handle: RePEc:eee:jbfina:v:11:y:1987:i:2:p:271-289

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

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References

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  1. John H. Boyd & Edward C. Prescott, 1985. "Financial intermediary-coalitions," Staff Report 87, Federal Reserve Bank of Minneapolis.
  2. Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-59, March.
  3. Ho, Thomas S. Y. & Saunders, Anthony, 1983. "Fixed Rate Loan Commitments, Take-Down Risk, and the Dynamics of Hedging with Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(04), pages 499-516, December.
  4. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  5. Milde, Hellmuth & Riley, John, 1984. "Signalling in credit markets," Discussion Papers, Series 1 185, University of Konstanz, Department of Economics.
  6. Campbell, Tim S, 1978. "A Model of the Market for Lines of Credit," Journal of Finance, American Finance Association, vol. 33(1), pages 231-44, March.
  7. Bhattacharya, Sudipto, 1980. "Nondissipative Signaling Structures and Dividend Policy," The Quarterly Journal of Economics, MIT Press, vol. 95(1), pages 1-24, August.
  8. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  9. Ramakrishnan, Ram T S & Thakor, Anjan V, 1984. "Information Reliability and a Theory of Financial Intermediation," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 415-32, July.
  10. Besanko, David & Thakor, Anjan V., 1987. "Competitive equilibrium in the credit market under asymmetric information," Journal of Economic Theory, Elsevier, vol. 42(1), pages 167-182, June.
  11. John G. Riley, 1974. "Competitive Signalling," UCLA Economics Working Papers 050, UCLA Department of Economics.
  12. Hajime Miyazaki, 1977. "The Rat Race and Internal Labor Markets," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 394-418, Autumn.
  13. James, Christopher, 1981. "Self-Selection and the Pricing of Bank Services: an Analysis of the Market for Loan Commitments and the Role of Compensating Balance Requirements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(05), pages 725-746, December.
  14. Engers, Maxim & Fernandez, Luis F, 1987. "Market Equilibrium with Hidden Knowledge and Self-selection," Econometrica, Econometric Society, vol. 55(2), pages 425-39, March.
  15. Arvan, Lanny & Brueckner, Jan K, 1986. "Efficient Contracts in Credit Markets Subject to Interest Rate Risk: AnApplication of Raviv's Insurance Model," American Economic Review, American Economic Association, vol. 76(1), pages 259-63, March.
  16. Spence, Michael, 1978. "Product differentiation and performance in insurance markets," Journal of Public Economics, Elsevier, vol. 10(3), pages 427-447, December.
  17. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
  18. Deshmukh, Sudhakar D & Greenbaum, Stuart I & Kanatas, George, 1982. " Bank Forward Lending in Alternative Funding Environments," Journal of Finance, American Finance Association, vol. 37(4), pages 925-40, September.
  19. Sealey, C. Jr. & Heinkel, Robert, 1985. "Asymmetric information and a theory of compensating balances," Journal of Banking & Finance, Elsevier, vol. 9(2), pages 193-205, June.
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