Information reusability, competition and bank asset quality
The paper explains the recent decline in bank asset quality using the notion of information reusability. Banks are viewed as information processors; they exist because of their advantage in extracting the surplus associated with the reusability of borrower-specific information. It is shown that a bank's incentive to screen loan applicants, and hence maintain the quality of its assets, depends on the surplus this screening can produce, which in turn depends on information reusability. Two recent changes in banks' operating environment are increased competition and greater temporal volatility in borrower credit risks. The former has directly reduced banks' informational surplus while the latter has impaired information reusability. Hence screening expenditures have been reduced and the diminution of screening has lowered the quality of bank assets. It is also shown that an increase in deposit insurance premia has an effect similar to that of narrowing interest spreads and therefore will result in reduced asset screening and impaired asset quality.
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- Millon, Marcia H & Thakor, Anjan V, 1985.
" Moral Hazard and Information Sharing: A Model of Financial Information Gathering Agencies,"
Journal of Finance,
American Finance Association, vol. 40(5), pages 1403-1422, December.
- Marcia H. Millon & Anjan V. Thakor, 2004. "Moral Hazard and Information Sharing: A Model of Financial Information Gathering Agencies," Finance 0411024, EconWPA.
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- Franklin Allen, "undated". "Contracts to Sell Information (Revised: 6-87)," Rodney L. White Center for Financial Research Working Papers 12-85, Wharton School Rodney L. White Center for Financial Research.
- Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 1985. "The deterioration of bank asset quality," Proceedings 71, Federal Reserve Bank of Chicago.
- Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414. Full references (including those not matched with items on IDEAS)
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