Credit Rationing Effects of Credit Value-at-Risk
AbstractBanks provide risky loans to firms which have superior information regarding the quality of their projects. Due to asymmetric information the banks face the risk of adverse selection. Credit Value-at-Risk (CVaR) regulation counters the problem of low quality, i.e. high risk, loans and therefore reduces the risk of the bank loan portfolio. However, CVaR regulation distorts the operation of credit markets. We show that a binding CVaR constraint introduces credit rationing and lowers social welfare. CVaR regulation also affects the operation of monetary policy.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 04-032/2.
Date of creation: 15 Mar 2004
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Credit rationing; Credit Value-at-Risk; asymmetric information; banks; regulation; loans;
Find related papers by JEL classification:
- D45 - Microeconomics - - Market Structure and Pricing - - - Rationing; Licensing
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-04-25 (All new papers)
- NEP-FIN-2004-04-25 (Finance)
- NEP-MON-2004-04-25 (Monetary Economics)
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