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Multiple-Bank Lending, Creditor Rights and Information Sharing

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Abstract

Multiple bank lending creates an incentive to overborrow and default. When creditor rights are poorly protected and collateral value is volatile, this incentive leads to rationing and non-competitive interest rates. If banks share information about past debts via credit reporting systems, the incentive to overborrow is mitigated: interest and default rates decrease; credit access improves if the value of collateral is not very volatile, but worsens otherwise. If credit reporting also allows banks to condition loans on clients’ subsequent debts, rationing disappears and interest rates drop to the competitive level. These predictions square with the findings of recent empirical studies.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 211.

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Date of creation: 31 Dec 2008
Date of revision: 28 Jul 2010
Handle: RePEc:sef:csefwp:211

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Keywords: multiple-bank lending; rationing; information sharing; common agency.;

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