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Safety Nets Within Banks

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Author Info
Felgenhauer, Mike
Grüner, Hans Peter
Abstract

We study how banks should protect their credit departments against the external influence from potential borrowers. We analyze four mechanisms that are widespread in practice: a credit board with unanimity or simple majority, a hierarchy and an advisory system. A bank faces a trade-off between the quality of information aggregation and the effectiveness of barriers against external influence. We provide a ranking of the different schemes. Some of them are equivalent even though the credit managers' decision power differs. In large credit decisions, banks should sacrifice on the quality of information aggregation in order to better protect the decision making process from outside influence.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6317.

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Date of creation: May 2007
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Handle: RePEc:cpr:ceprdp:6317

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Related research
Keywords: hierarchies; lobbying; voting rules;

Find related papers by JEL classification:
D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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    Other versions:
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