Advanced Search
MyIDEAS: Login

Can Banks Learn to Be Rational?

Contents:

Author Info

  • Haider A. Khan

    (GSIS University of Denver and CIRJE, University of Tokyo)

Abstract

Can banks learn to be rational in their lending activities? The answer depends on the institutionally bounded constraints to learning. From an evolutionary perspective the functionality (for survival) of "learning to be rational" creates strong incentives for such learning without, however, guaranteeing that each member of the particular economic species actually achieves increased fitness. I investigate this issue for a particular economic species, namely, commrercial banks. The purpose of this paper is to illustrate the key issues related to learning in an economic model by proposing a new screening model for bank commercial loans that uses the neuro fuzzy technique. The technical modeling aspect is integrally connected in a rigorous way to the key conceptual and theoretical aspects of the capabilities for learning to be rational in a broad but precise sense. This paper also compares the relative predictability of loan default among three methods of prediction--- discriminant analysis, logit type regression, and neuro fuzzy--- based on the real data obtained from one of the banks in Taiwan.The neuro fuzzy model, in contrast with the other two, incorporates recursive learning in a real world, imprecise linguistic environment. The empirical results show that in addition to its better screening ability, the neuro fuzzy model is superior in explaining the relationship among the variables as well. With further modifications,this model could be used by bank regulatory agencies for loan examination and by bank loan officers for loan review. The main theoretical conclusion to draw from this demonstration is that non-linear learning in a vague semantic world is both possible and useful. Therefore the search for alternatives to the full neoclassical rationality and its equivalent under uncertainty---rational expectations--- is a plausible and desirable search, especially when the probability for convergence to a rational expectations equilibrium is low.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2002/2002cf151.pdf
Download Restriction: no

Bibliographic Info

Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-151.

as in new window
Length: 26 pages
Date of creation: May 2002
Date of revision:
Handle: RePEc:tky:fseres:2002cf151

Contact details of provider:
Postal: Hongo 7-3-1, Bunkyo-ku, Tokyo 113-0033
Phone: +81-3-5841-5644
Fax: +81-3-5841-8294
Email:
Web page: http://www.cirje.e.u-tokyo.ac.jp/index.html
More information through EDIRC

Related research

Keywords:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Collins, Robert A. & Green, Richard D., 1982. "Statistical methods for bankruptcy forecasting," Journal of Economics and Business, Elsevier, vol. 34(4), pages 349-354.
  2. Chen, Liang-Hsuan & Chiou, Tai-Wei, 1999. "A fuzzy credit-rating approach for commercial loans: a Taiwan case," Omega, Elsevier, vol. 27(4), pages 407-419, August.
  3. Yang, Z. R. & Platt, Marjorie B. & Platt, Harlan D., 1999. "Probabilistic Neural Networks in Bankruptcy Prediction," Journal of Business Research, Elsevier, vol. 44(2), pages 67-74, February.
  4. Lacher, R. C. & Coats, Pamela K. & Sharma, Shanker C. & Fant, L. Franklin, 1995. "A neural network for classifying the financial health of a firm," European Journal of Operational Research, Elsevier, vol. 85(1), pages 53-65, August.
  5. Levy, J & Mallach, E & Duchessi, P, 1991. "A fuzzy logic evaluation system for commercial loan analysis," Omega, Elsevier, vol. 19(6), pages 651-669.
  6. Kar Yan Tam & Melody Y. Kiang, 1992. "Managerial Applications of Neural Networks: The Case of Bank Failure Predictions," Management Science, INFORMS, vol. 38(7), pages 926-947, July.
  7. Srinivasan, Venkat & Kim, Yong H, 1987. " Credit Granting: A Comparative Analysis of Classification Procedures," Journal of Finance, American Finance Association, vol. 42(3), pages 665-81, July.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Khan, Haider, 2013. "Globalization and Democracy: A Short Introduction," MPRA Paper 49515, University Library of Munich, Germany.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:tky:fseres:2002cf151. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CIRJE administrative office).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.