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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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