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Theories of loan commitments: a literature review

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  • O. Emre Ergungor

Abstract

A 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.

Suggested Citation

  • O. Emre Ergungor, 2001. "Theories of loan commitments: a literature review," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 2-19.
    • Handle: RePEc:fip:fedcer:y:2001:i:qiii:p:2-19
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    References listed on IDEAS

    as
    1. Avery, Robert B. & Berger, Allen N., 1991. "Loan commitments and bank risk exposure," Journal of Banking & Finance, Elsevier, vol. 15(1), pages 173-192, February.
    2. 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(1), pages 83-95, March.
    3. Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
    4. Billett, Matthew T & Flannery, Mark J & Garfinkel, Jon A, 1995. "The Effect of Lender Identity on a Borrowing Firm's Equity Return," Journal of Finance, American Finance Association, vol. 50(2), pages 699-718, June.
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    Cited by:

    1. Park Ki. Young, 2012. "Interstate Banking Deregulation and Bank Loan Commitments," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(2), pages 1-29, March.
    2. Russell D. Kashian & Ran Tao, 2014. "Off-balance sheet activities and community bank performance," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 41(6), pages 789-807, November.
    3. Bag, Pinaki, 2010. "Exposure at Default Model for Contingent Credit Line," MPRA Paper 20387, University Library of Munich, Germany.
    4. O. Emre Ergungor, 2002. "Market- vs. bank-based financial systems: do investor rights really matter?," Working Papers (Old Series) 0101R, Federal Reserve Bank of Cleveland.
    5. 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.

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