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Bank Credit Commitments, Credit Rationing, and Monetary Policy

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  • Morgan, Donald P

Abstract

When loan needs are uncertain and bankruptcy is costly, contracts resembling bank credit commitments dominate ordinary debt contracts. The fees charged on commitments reduce bankruptcy risk by smoothing out borrowers' loan payments. Reduced bankruptcy risk entitles borrowers to larger loans, thereby reducing the risk of quantity rationing. Even if commitments reduce rationing risk, monetary policy is not necessarily weaker under commitment finance. A rise in lenders' cost of funds, perhaps reflecting a monetary contraction, can reduce the expected value of a project more under a commitment than under an ordinary debt contract. Copyright 1994 by Ohio State University Press.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 26 (1994)
Issue (Month): 1 (February)
Pages: 87-101

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Handle: RePEc:mcb:jmoncb:v:26:y:1994:i:1:p:87-101

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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Cited by:
  1. Rodolphe Blavy, 2005. "Monitoring and Commitment in Bank Lending Behavior," IMF Working Papers 05/222, International Monetary Fund.
  2. Mitusch, Kay, 2002. "Debt contracts, banks, and aggregate liquidity," Economics Letters, Elsevier, vol. 74(2), pages 145-150, January.
  3. Allen N. Berger & Gregory F. Udell, 1998. "The economics of small business finance: the roles of private equity and debt markets in the financial growth cycle," Finance and Economics Discussion Series 1998-15, Board of Governors of the Federal Reserve System (U.S.).
  4. Sumit Agarwal & Souphala Chomsisengphet & John C. Driscoll, 2004. "Loan commitments and private firms," Finance and Economics Discussion Series 2004-27, Board of Governors of the Federal Reserve System (U.S.).
  5. Martin, J. Spencer & Santomero, Anthony M., 1997. "Investment opportunities and corporate demand for lines of credit," Journal of Banking & Finance, Elsevier, vol. 21(10), pages 1331-1350, October.

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