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Loan commitments and bank risk exposure

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Author Info

  • Robert B. Avery
  • Allen N. Berger

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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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 36.

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Date of creation: 1988
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Handle: RePEc:fip:fedgfe:36

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Related research

Keywords: Bank loans ; Risk;

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References

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  1. Boot, A.W.A. & Thakor, A.V. & Udell, G.F., 1987. "Credible commitments, contract enforcement problems and banks: Intermediation as credibility assurance," Research Memorandum 282, Tilburg University, Faculty of Economics and Business Administration.
  2. 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.
  3. Sofianos, George & Wachtel, Paul & Melnik, Arie, 1990. "Loan commitments and monetary policy," Journal of Banking & Finance, Elsevier, vol. 14(4), pages 677-689, October.
  4. Gary D. Koppenhaver, 1987. "The effects of regulation on bank participation in the guarantee market," Staff Memoranda 87-6, Federal Reserve Bank of Chicago.
  5. Anjan V. Thakor & Gregory F. Udell, 2004. "An Economic Rationale for the Pricing Structure of Bank Loan Commitments," Finance 0411053, EconWPA.
  6. 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.).
  7. 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.
  8. Melnik, Arie & Plaut, Steven E., 1986. "The economics of loan commitment contracts: Credit pricing and utilization," Journal of Banking & Finance, Elsevier, vol. 10(2), pages 267-280, June.
  9. Boot, Arnoud & Thakor, Anjan V. & Udell, Gregory F., 1987. "Competition, risk neutrality and loan commitments," Journal of Banking & Finance, Elsevier, vol. 11(3), pages 449-471, September.
  10. James, Christopher, 1982. " An Analysis of Bank Loan Rate Indexation," Journal of Finance, American Finance Association, vol. 37(3), pages 809-25, June.
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