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Loan Commitments and Credit Demand Uncertainty

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Author Info
Stuart Greenbaum (Northwestern University)
George Kanatas (Indiana University)
Itzhak Venezia (Hebrew University)
Abstract

We provide an explanation for loan commitments unrelated to borrower credit-worthiness. In our model, banks can use loan commitments to reduce uncertainty regarding their own future funding needs. Given a cost advantage to banks that can acquire such information, there exists an equilibrium demand for commitments by risk-neutral firms. The purchase of the loan commitment and the choice of contract terms reveals the buyer's private information regarding future credit needs. In order to ensure the sorting of the a priori indistinguishable applicants according to their private information, we show that a usage fee applied to the commitment-holder's unused credit line is necessary.

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File URL: http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1175&context=anderson/fin
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Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number 1175.

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Date of creation: 01 Mar 1990
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Handle: RePEc:cdl:anderf:1175

Note: oai:cdlib1:anderson/fin-1175
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  1. Santomero, Anthony M, 1984. "Modeling the Banking Firm: A Survey," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 576-602, November. [Downloadable!] (restricted)
  2. Baltensperger, Ernst, 1980. "Alternative approaches to the theory of the banking firm," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 1-37, January. [Downloadable!] (restricted)
  3. Melnik, Arie & Plaut, Steven, 1986. " Loan Commitment Contracts, Terms of Lending, and Credit Allocation," Journal of Finance, American Finance Association, vol. 41(2), pages 425-35, June. [Downloadable!] (restricted)
  4. Kanatas, George, 1987. "Commercial paper, bank reserve requirements, and the informational role of loan commitments," Journal of Banking & Finance, Elsevier, vol. 11(3), pages 425-448, September. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
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This page was last updated on 2009-11-19.

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