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Banking Competition and Soft Budget Constraints: How Market Power can threaten Discipline in Lending

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  • Stefan Arping

    (University of Amsterdam)

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    Abstract

    In imperfectly competitive credit markets, banks can face a tradeoff between exploiting their market power and enforcing hard budget constraints. As market power rises, banks eventually find it too costly to discipline underperforming borrowers by stopping their projects. Lending relationships become "too cozy", interest rates rise, and loan performance deteriorates.

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    File URL: http://papers.tinbergen.nl/12146.pdf
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    Bibliographic Info

    Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 12-146/IV/DSF49.

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    Date of creation: 20 Dec 2012
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    Handle: RePEc:dgr:uvatin:20120146

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    Web page: http://www.tinbergen.nl

    Related research

    Keywords: Banking Competition; Soft Budget Constraint Problem; Moral Hazard;

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    11. Marianne Bertrand & Antoinette Schoar & David Thesmar, 2007. "Banking Deregulation and Industry Structure: Evidence from the French Banking Reforms of 1985," Journal of Finance, American Finance Association, vol. 62(2), pages 597-628, 04.
    12. Beck, Thorsten & De Jonghe, Olivier & Schepens, Glenn, 2013. "Bank competition and stability: Cross-country heterogeneity," Journal of Financial Intermediation, Elsevier, vol. 22(2), pages 218-244.
    13. Repullo, Rafael & Suarez, Javier, 1998. "Monitoring, Liquidation, and Security Design," Review of Financial Studies, Society for Financial Studies, vol. 11(1), pages 163-87.
    14. Schmidt, Klaus M., 1997. "Managerial Incentives and Product Market Competition," Munich Reprints in Economics 19772, University of Munich, Department of Economics.
    15. Hakenes, Hendrik & Schnabel, Isabel, 2011. "Capital regulation, bank competition, and financial stability," Economics Letters, Elsevier, vol. 113(3), pages 256-258.
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