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An Economic Rationale for the Pricing Structure of Bank Loan Commitments

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Author Info
Anjan V. Thakor (Washington University in St. Louis)
Gregory F. Udell (New York University)

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Abstract

An economic rationale is provided for the competitive equilibrium deployment of commitment and usage fees in loan commitment pricing. It is shown that, under perfect information, assessing both fees rather than just one permits optimal risk sharing. When the borrower is privately informed about its probability of future commitment utilization, commitment and usage fees can be used to induce borrowers to identify themselves by self-selection through contract choice. The equilibrium characterized here is dissipative and thus raises the usual existence questions which are addressed in the paper.

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Paper provided by EconWPA in its series Finance with number 0411053.

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Length: 19 pages
Date of creation: 30 Nov 2004
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Handle: RePEc:wpa:wuwpfi:0411053

Note: Type of Document - pdf; pages: 19
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G - Financial Economics

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  1. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December. [Downloadable!] (restricted)
  2. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April. [Downloadable!] (restricted)
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  3. Arvan, Lanny & Brueckner, Jan K, 1986. "Efficient Contracts in Credit Markets Subject to Interest Rate Risk: AnApplication of Raviv's Insurance Model," American Economic Review, American Economic Association, vol. 76(1), pages 259-63, March. [Downloadable!] (restricted)
  4. Hajime Miyazaki, 1977. "The Rat Race and Internal Labor Markets," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 394-418, Autumn. [Downloadable!] (restricted)
  5. Riley, John G., 1975. "Competitive signalling," Journal of Economic Theory, Elsevier, vol. 10(2), pages 174-186, April. [Downloadable!] (restricted)
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  6. Sealey, C. Jr. & Heinkel, Robert, 1985. "Asymmetric information and a theory of compensating balances," Journal of Banking & Finance, Elsevier, vol. 9(2), pages 193-205, June. [Downloadable!] (restricted)
  7. Bhattacharya, Sudipto, 1980. "Nondissipative Signaling Structures and Dividend Policy," The Quarterly Journal of Economics, MIT Press, vol. 95(1), pages 1-24, August.
  8. Engers, Maxim & Fernandez, Luis F, 1987. "Market Equilibrium with Hidden Knowledge and Self-selection," Econometrica, Econometric Society, vol. 55(2), pages 425-39, March. [Downloadable!] (restricted)
  9. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
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  11. Spence, Michael, 1978. "Product differentiation and performance in insurance markets," Journal of Public Economics, Elsevier, vol. 10(3), pages 427-447, December. [Downloadable!] (restricted)
  12. Ramakrishnan, Ram T S & Thakor, Anjan V, 1984. "Information Reliability and a Theory of Financial Intermediation," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 415-32, July. [Downloadable!] (restricted)
  13. Besanko, David & Thakor, Anjan V., 1987. "Competitive equilibrium in the credit market under asymmetric information," Journal of Economic Theory, Elsevier, vol. 42(1), pages 167-182, June. [Downloadable!] (restricted)
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  14. Campbell, Tim S, 1978. "A Model of the Market for Lines of Credit," Journal of Finance, American Finance Association, vol. 33(1), pages 231-44, March. [Downloadable!] (restricted)
  15. Deshmukh, Sudhakar D & Greenbaum, Stuart I & Kanatas, George, 1982. " Bank Forward Lending in Alternative Funding Environments," Journal of Finance, American Finance Association, vol. 37(4), pages 925-40, September. [Downloadable!] (restricted)
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(explanations, 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.)

  1. Ozgur Emre Ergungor, 2000. "Relationship loans and information exploitability in a competitive market: loan commitments vs. spot loans," Working Paper 0013, Federal Reserve Bank of Cleveland. [Downloadable!]
  2. James R. Booth & Lena Chua, 1995. "Structure and pricing of large bank loans," Economic Review, Federal Reserve Bank of San Francisco, pages 52-62. [Downloadable!]
  3. Sangkyun Park, 2004. "Consumer rationality and credit card pricing: An explanation based on the option value of credit lines," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 25(5), pages 243-254. [Downloadable!]
  4. Evan Gatev & Philip E. Strahan, 2003. "Banks' Advantage in Hedging Liquidity Risk: Theory and Evidence from the Commercial Paper Market," Center for Financial Institutions Working Papers 03-01, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  5. Allen N. Berger & Gregory F. Udell, 2001. "Small business credit availability and relationship lending: the importance of bank organizational structure," Finance and Economics Discussion Series 2001-36, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  6. Robert B. Avery & Allen N. Berger, 1990. "Loan commitments and bank risk exposure," Working Paper 9015, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  7. O. Emre Ergungor, 2002. "Community banks as small business lenders: the tough road ahead," Working Paper 0203, Federal Reserve Bank of Cleveland. [Downloadable!]
  8. Arnoud Boot & Anjan V. Thakor & Gregory F. Udell, 2004. "Competition, Risk Neutrality and Loan Commitments," Finance 0411051, EconWPA. [Downloadable!]
    Other versions:
  9. Sumit Agarwal & Souphala Chomsisengphet & John C. Driscoll, 2004. "Loan commitments and private firms," Finance and Economics Discussion Series 2004-27, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  10. Issam Hallak, 2003. "Bank Loans Non-Linear Structure of Pricing: Empirical Evidence from Sovereign Debts," CFS Working Paper Series 2003/33, Center for Financial Studies. [Downloadable!]
  11. Issam Hallak, 2001. "The Determinants of Up-Front Fees on Bank Loans to LDC Sovereigns," Economics Series Working Papers 075, University of Oxford, Department of Economics. [Downloadable!]
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