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Why do Banks Fail?

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  • Santonu Basu

Abstract

Banks advance loans in the absence of precise knowledge in relation to the outcome of borrowers' projects. Consequently, uncertainty in relation to loan repayment emerges. Thus, banks introduce the 'credit standard' as insurance against loans, so that should borrowers' projects fail, borrowers have an alternative means of honouring their debt obligations. It is argued in this paper that in the competitive atmosphere under which this sector operates, it is not possible to secure the entire loan portfolio by introducing the credit standard, and in recent years this difficulty has been further exacerbated by financial liberalisation, which may have caused bank failures.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal International Review of Applied Economics.

Volume (Year): 17 (2003)
Issue (Month): 3 ()
Pages: 231-248

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Handle: RePEc:taf:irapec:v:17:y:2003:i:3:p:231-248

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References

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  2. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February.
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Cited by:
  1. Arestis, Philip & Basu, Santonu, 2004. "Financial globalisation and regulation," Research in International Business and Finance, Elsevier, vol. 18(2), pages 129-140, June.
  2. Santonu Basu, 2006. "Structural Problems in Financing Development: Issues Relating to India," International Review of Applied Economics, Taylor & Francis Journals, vol. 20(1), pages 85-101.
  3. Sumon Kumar Bhaumik & Jenifer Piesse, 2006. "Does lending behaviour of banks in emerging economies vary by ownership? Evidence from the Indian banking sector," CEDI Discussion Paper Series 06-01, Centre for Economic Development and Institutions(CEDI), Brunel University.

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