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Loan commitments and bank risk exposure

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Author Info
Robert B. Avery
Allen N. Berger

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Abstract

Loan commitments increase a bank's risk by obligating it to issue future loans under terms that it might otherwise refuse. However, moral hazard and adverse selection problems potentially may result in these contracts being rationed or sorted. Depending on the relative risks of the borrowers who do and do not receive commitments, commitment loans could be safer or riskier on average than other loans. the empirical results indicate that commitment loans tend to have slightly better than average performance, suggesting that commitments generate little risk or that this risk is offset by the selection of safer borrowers.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9015.

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Date of creation: 1990
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Handle: RePEc:fip:fedcwp:9015

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Keywords: Bank loans ; Risk;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Reuven Glick and Steven E. Plaut., 1988. "Money and Off-Balance-Sheet Liquidity: An Empirical Analysis," Research Program in Finance Working Papers 182, University of California at Berkeley.
  2. Robert B. Avery & Allen N. Berger, 1989. "Loan commitments and bank risk exposure," Finance and Economics Discussion Series 65, Board of Governors of the Federal Reserve System (U.S.).
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  3. Arnoud Boot & Anjan V. Thakor & Gregory F. Udell, 2004. "Competition, Risk Neutrality and Loan Commitments," Finance 0411051, EconWPA. [Downloadable!]
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  4. James, Christopher, 1982. " An Analysis of Bank Loan Rate Indexation," Journal of Finance, American Finance Association, vol. 37(3), pages 809-25, June. [Downloadable!] (restricted)
  5. Boot, Arnoud W. A. & Thakor, Anjan V. & Udell, Gregory F., 1991. "Credible commitments, contract enforcement problems and banks: Intermediation as credibility assurance," Journal of Banking & Finance, Elsevier, vol. 15(3), pages 605-632, June. [Downloadable!] (restricted)
  6. Ham, John C & Melnik, Arie, 1987. "Loan Demand: An Empirical Analysis Using Micro Data," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 704-09, November.
  7. Thakor, Anjan V. & Udell, Gregory F., 1987. "An economic rationale for the pricing structure of bank loan commitments," Journal of Banking & Finance, Elsevier, vol. 11(2), pages 271-289, June. [Downloadable!] (restricted)
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  8. Gary D. Koppenhaver, 1987. "The effects of regulation on bank participation in the guarantee market," Staff Memoranda 87-6, Federal Reserve Bank of Chicago.
  9. Sofianos, George & Wachtel, Paul & Melnik, Arie, 1990. "Loan commitments and monetary policy," Journal of Banking & Finance, Elsevier, vol. 14(4), pages 677-689, October. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Yungsan Kim & Woon Gyu Choi, 2001. "Monetary Policy and Corporate Liquid Asset Demand," IMF Working Papers 01/177, International Monetary Fund. [Downloadable!]
  2. James R. Booth & Lena Chua, 1995. "Structure and pricing of large bank loans," Economic Review, Federal Reserve Bank of San Francisco, pages 52-62. [Downloadable!]
  3. William B. English & William R. Nelson, 1998. "Bank risk rating of business loans," Finance and Economics Discussion Series 1998-51, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Ghosh, Saibal & Nachane, D M, 2002. "Off-balance sheet activities in banking: Theory and Indian experience," MPRA Paper 17408, University Library of Munich, Germany. [Downloadable!]
  5. O. Emre Ergungor, 2001. "Theories of loan commitments: a literature review," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 2-19. [Downloadable!]
  6. Joe Peek & Eric S. Rosengren, 1996. "Derivatives activity at troubled banks," Working Papers 96-3, Federal Reserve Bank of Boston. [Downloadable!]
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  7. Mitchell Berlin & Loretta J. Mester, 1997. "On the profitability and cost of relationship lending," Working Papers 97-3, Federal Reserve Bank of Philadelphia. [Downloadable!]
    Other versions:
  8. Sangkyun Park, 1997. "Option value of credit lines as an explanation of high credit card rates," Research Paper 9702, Federal Reserve Bank of New York. [Downloadable!]
  9. Cresenta Fernando & Atreya Chakraborty & Rajiv Mallick, 2002. "The Importance of Being Known: Relationship Banking and Credit Limits," Finance 0209007, EconWPA. [Downloadable!]
  10. Robert B. Avery & Allen N. Berger, 1990. "Loan commitments and bank risk exposure," Working Paper 9015, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  11. Robert B. Avery & Allen N. Berger, 1990. "Risk-based capital and deposit insurance reform," Working Paper 9101, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  12. Nachane, D M & Ghosh, Saibal, 2007. "An empirical analysis of the off-balance sheet activities of Indian banks," MPRA Paper 17304, University Library of Munich, Germany. [Downloadable!]
  13. Deep, Akash & Schaefer, Guido, 2004. "Are Banks Liquidity Transformers?," Working Paper Series rwp04-022, Harvard University, John F. Kennedy School of Government. [Downloadable!]
  14. Lamont K. Black & Richard J. Rosen, 2007. "How the credit channel works: differentiating the bank lending channel and the balance sheet channel," Working Paper Series WP-07-13, Federal Reserve Bank of Chicago. [Downloadable!]
  15. Nachane, D M & Narain, Aditya & Ghosh, Saibal & Sahoo, Satyananda, 2001. "Bank response to capital requirements: Theory and Indian evidence," MPRA Paper 17453, University Library of Munich, Germany. [Downloadable!]
  16. Sumit Agarwal & Souphala Chomsisengphet & John C. Driscoll, 2004. "Loan commitments and private firms," Finance and Economics Discussion Series 2004-27, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  17. Allen Berger & Gregory Udell, 1994. "Lines of Credit and Relationship Lending in Small Firm Finance," Center for Financial Institutions Working Papers 94-11, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
    Other versions:
  18. William P. Osterberg & James B. Thomson, 1994. "Underlying determinants of closed-bank resolution costs," Working Paper 9403, Federal Reserve Bank of Cleveland. [Downloadable!]
  19. William P. Osterberg & James B. Thomson, 1997. "Depositor preference legislation and failed banks' resolution costs," Working Paper 9715, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
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