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Monitoring and Commitment in Bank Lending Behavior

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  • Rodolphe Blavy
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    Abstract

    The paper proposes a theoretical argument on the nature of bank lending, based on the idea that, through commitment and monitoring, banks overcome basic informational asymmetries with borrowers. By bringing together loan commitment theories and credit rationing theories, the paper shows that, within a framework of asymmetric information between lenders and borrowers and under costly termination of lending arrangements, commitment may explain the accumulation of nonperforming loans by banks. Two additional results follow: (i) that banks favor borrowers with well-known production functions and long-term credit history; and (ii) that interest rate spreads may be large if significant market imperfections prevail.

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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=18658
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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/222.

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    Length: 34
    Date of creation: 01 Nov 2005
    Date of revision:
    Handle: RePEc:imf:imfwpa:05/222

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    Related research

    Keywords: Credit; Banking; Bank credit; Bank supervision; probability; equation; bank lending; loan commitment; equations; banking environment; control systems; banking sector; internal control; nonperforming loan; bank loan rate indexation; bank loan; bank acts; bank monitoring; deposit insurance; banking firm; information dissemination; bank runs; connected lending; bank behavior;

    This paper has been announced in the following NEP Reports:

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    1. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    2. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
    3. 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.
    4. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    5. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
    6. J. G. Haubrich, . "Financial Intermediation: Delegated Monitoring and Long-Term Relationships," Rodney L. White Center for Financial Research Working Papers 9-86, Wharton School Rodney L. White Center for Financial Research.
    7. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    8. Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers 572, Queen's University, Department of Economics.
    9. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
    10. Morgan, Donald P, 1994. "Bank Credit Commitments, Credit Rationing, and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 87-101, February.
    11. Mathias Dewatripont & Eric Maskin, 2004. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9605, ULB -- Universite Libre de Bruxelles.
    12. Benston, George J & Smith, Clifford W, Jr, 1976. "A Transactions Cost Approach to the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 31(2), pages 215-31, May.
    13. Melnik, Arie & Plaut, Steven, 1986. " Loan Commitment Contracts, Terms of Lending, and Credit Allocation," Journal of Finance, American Finance Association, vol. 41(2), pages 425-35, June.
    14. 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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