IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v11y1987i3p473-497.html

Bank portfolio choice with private information about loan quality : Theory and implications for regulation

Author

Listed:
  • Lucas, Deborah
  • McDonald, Robert L.

Abstract

This paper models bank asset choice when shareholders know more about loan quality than do outsiders. Because of this informational asymmetry, the price of loans in the secondary market is the price for poor quality loans. Banks desire to hold marketable securities in order to avoid liquidating good quality loans at the "lemons" price, but also have a countervailing desire to hold risky loans in order to maximize the value of deposit insurance. In this context, portfolio composition and bank safety is examined as a function of the market distribution of loan quality, and the distribution of deposits. The model suggests that off-balance sheet commitments have little effect on bankruptcy risk, and induce banks to hold more securities. We also show that an increase in the bank equity requirement will unambiguously increase bank safety in the long run. In the short run, banks are unambiguously riskier on-balance-sheet, although the effect on bank safety is ambiguous.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Lucas, Deborah & McDonald, Robert L., 1987. "Bank portfolio choice with private information about loan quality : Theory and implications for regulation," Journal of Banking & Finance, Elsevier, vol. 11(3), pages 473-497, September.
    • Handle: RePEc:eee:jbfina:v:11:y:1987:i:3:p:473-497
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/0378-4266(87)90044-6
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or

    for a different version of it.

    Other versions of this item:

    Citations

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


    Cited by:

    1. Freixas, Xavier & Gabillon, Emmanuelle, 1999. "Optimal Regulation of a Fully Insured Deposit Banking System," Journal of Regulatory Economics, Springer, vol. 16(2), pages 111-134, September.
    2. William P. Osterberg, 1990. "Bank capital requirements and leverage: a review of the literature," Economic Review, Federal Reserve Bank of Cleveland, vol. 26(Q IV), pages 2-12.
    3. Priyank Gandhi, 2018. "The relation between bank credit growth and the expected returns of bank stocks," European Financial Management, European Financial Management Association, vol. 24(4), pages 610-649, September.
    4. Lys, Thomas, 1996. "Abandoning the transactions-based accounting model: Weighing the evidence," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 155-175, October.
    5. Andrew Winton, 1996. "Monitored finance, liquidity, and institutional investment choice," Working Papers (Old Series) 9616, Federal Reserve Bank of Cleveland.
    6. Patrick Leoni, "undated". "Banking Regulation without Commitment to Audit," IEW - Working Papers 251, Institute for Empirical Research in Economics - University of Zurich.
    7. Banerjee, Saugata & Cadot, Olivier, 1996. "Syndicated lending under asymmetric creditor information -- Erratum," Journal of Development Economics, Elsevier, vol. 50(1), pages 211-212, June.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:11:y:1987:i:3:p:473-497. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.