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The winner's curse in banking

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  • Sherril Shaffer

Abstract

Theoretical studies have noted that loan applications rejected by one bank can apply at another bank, systematically worsening the pool of applicants faced by all banks. This paper presents the first empirical evidence of this effect and explores some additional ramifications, including the role of common filters, such as commercially available credit scoring models, in mitigating this adverse selection, implications for de novo banks, implications for banks' incentives to comply with fair lending laws, and macroeconomic effects.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 97-25.

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Date of creation: 1997
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Handle: RePEc:fip:fedpwp:97-25

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Keywords: Bank loans ; Credit scoring systems;

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References

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  1. Joseph P. Hughes & William Lang & Loretta J. Mester & Choon-Geol Moon, 1996. "Efficient banking under interstate branching," Proceedings, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), pages 1045-1075.
  2. Shaffer, Sherrill, 1993. "Can megamergers improve bank efficiency?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 17(2-3), pages 423-436, April.
  3. Shaffer, Sherrill, 1993. "A Test of Competition in Canadian Banking," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 25(1), pages 49-61, February.
  4. Krol, Robert & Svorny, Shirley, 1996. "The effect of the bank regulatory environment on state economic activity," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 26(5), pages 531-541, August.
  5. Robert B. Avery & Raphael W. Bostic & Paul S. Calem & Glenn B. Canner, 1996. "Credit risk, credit scoring, and the performance of home mortgages," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 621-648.
  6. Loretta J. Mester, 1992. "Efficiency in the savings and loan industry," Working Papers, Federal Reserve Bank of Philadelphia 92-14, Federal Reserve Bank of Philadelphia.
  7. Jayaratne, Jith & Strahan, Philip E, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(3), pages 639-70, August.
  8. Alli Nathan & Edwin H. Neave, 1989. "Competition and Contestability in Canada's Financial System: Empirical Results," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 22(3), pages 576-94, August.
  9. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
  10. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, Econometric Society, vol. 58(2), pages 429-52, March.
  11. Sherrill Shaffer & James DiSalvo, 1991. "Conduct in a banking duopoly," Working Papers, Federal Reserve Bank of Philadelphia 91-12, Federal Reserve Bank of Philadelphia.
  12. Ferguson, Michael F & Peters, Stephen R, 1995. " What Constitutes Evidence of Discrimination in Lending?," Journal of Finance, American Finance Association, American Finance Association, vol. 50(2), pages 739-48, June.
  13. Shaffer, Sherrill, 1996. " Evidence of Discrimination in Lending: An Extension," Journal of Finance, American Finance Association, American Finance Association, vol. 51(4), pages 1551-54, September.
  14. Leonard I. Nakamura, 1993. "Loan screening within and outside of customer relationships," Working Papers, Federal Reserve Bank of Philadelphia 93-15, Federal Reserve Bank of Philadelphia.
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