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The Impact of Liquidity Constraints on Bank Lending Policy

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  • Webb, David C

Abstract

This paper examines banks' provision of liquidity to depositors and provision of loans. The problem identified is that banks may not be able to provide new funds for borrowers who are short of cash, because either the return on investments is poor, or because depositors withdraw more funds than expected. Banks subject to liquidity shortages may ration loans to good borrowers. This problem is shown to depend upon the nature of the deposit contract and banks' inability to issue subordinated deposits. State contingent renegotiation of loans and matching of the duration of project returns and investment needs mitigates the problem.

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  • Webb, David C, 2000. "The Impact of Liquidity Constraints on Bank Lending Policy," Economic Journal, Royal Economic Society, vol. 110(460), pages 69-91, January.
  • Handle: RePEc:ecj:econjl:v:110:y:2000:i:460:p:69-91
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    Cited by:

    1. Robin Boadway & Jean-Fran├žois Tremblay, 2003. "Public Economics and Startup Entrepreneurs," CESifo Working Paper Series 877, CESifo Group Munich.
    2. Mateusz Mokrogulski, 2014. "Wojna depozytowa w polskim sektorze bankowym," Gospodarka Narodowa, Warsaw School of Economics, issue 4, pages 79-99.
    3. HAKIMI Abdelaziz & Ahmet DKHILI Hichem & KHLAIFIA Wafa, 2012. "Universal Banking and Credit Risk: Evidence from Tunisia," International Journal of Economics and Financial Issues, Econjournals, vol. 2(4), pages 496-504.
    4. Berger, Allen N. & Bouwman, Christa H. S. & Kick, Thomas & Schaeck, Klaus, 2010. "Bank liquidity creation and risk taking during distress," Discussion Paper Series 2: Banking and Financial Studies 2010,05, Deutsche Bundesbank.

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