Learning by Lending, Competition, and Screening Incentives in the Banking Industry
AbstractThis paper shows that banks may have an incentive to reduce screening when the proportion of untested borrowers on the market increases, leading to a deterioration of their portfolios and a contraction of their profits. The paper addresses the issue in the context of a simple model where banks compete solely on screening and in a more complex model where banks compete by offering borrowers a menu of contracts. The results have policy implications with regard to financial liberalization, lending booms, and banking crises, as those occurred at different times in many emerging markets.
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Bibliographic InfoPaper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 00-10.
Date of creation: Feb 2000
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