Theories of loan commitments: a literature review
AbstractA loan commitment is an agreement by which a bank promises to lend to a customer at prespecified terms while retaining the right to renege on its promise if the borrower's creditworthiness deteriorates. The contract also specifies the various fees that must be paid over the life of the commitment. Loan commitments are widely used in the economy. As their use has spread, a rich literature has evolved to explain why they exist, how they are priced, and how they affect the risk of the bank and the deposit insurer. This article summarizes what we have learned on these issues. Its main insight is that loan commitments are an optimal tool for risk sharing and for resolving informational problems. The author also points out some issues that the current literature leaves unexplained.
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Bibliographic InfoArticle provided by Federal Reserve Bank of Cleveland in its journal Economic Review.
Volume (Year): (2001)
Issue (Month): Q III ()
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- Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
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Finance and Economics Discussion Series
36, Board of Governors of the Federal Reserve System (U.S.).
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- Berkovitch, Elazar & Greenbaum, Stuart I., 1991. "The Loan Commitment as an Optimal Financing Contract," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(01), pages 83-95, March.
- Stanhouse, Bryan & Schwarzkopf, Al & Ingram, Matt, 2011. "A computational approach to pricing a bank credit line," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1341-1351, June.
- Bag, Pinaki, 2010. "Exposure at Default Model for Contingent Credit Line," MPRA Paper 20387, University Library of Munich, Germany.
- Ozgur Emre Ergungor, 2002. "Market- vs. bank-based financial systems: do investor rights really matter?," Working Paper 0101R, Federal Reserve Bank of Cleveland.
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