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The Winner's Curse in Banking

  • Shaffer, Sherrill

Theoretical studies have noted that loan applications rejected by one bank can apply at another bank, systematically worsening the pool of applicants faced by all banks. This paper presents the first empirical evidence of this effect and explores some additional ramifications, including the role of common filters, such as commercially available credit scoring models, in mitigating this adverse selection, implications for de novo banks, implications for banks' incentives to comply with fair lending laws, and macroeconomic effects.

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Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 7 (1998)
Issue (Month): 4 (October)
Pages: 359-392

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Handle: RePEc:eee:jfinin:v:7:y:1998:i:4:p:359-392
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622875

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  1. Leonard I. Nakamura, 1993. "Loan screening within and outside of customer relationships," Working Papers 93-15, Federal Reserve Bank of Philadelphia.
  2. Joseph P. Hughes & Choon-Geol Moon, 1997. "Efficient Banking Under Interstate Branching," Departmental Working Papers 199609, Rutgers University, Department of Economics.
  3. Robert B. Avery & Raphael W. Bostic & Paul S. Calem & Glenn B. Canner, 1996. "Credit risk, credit scoring, and the performance of home mortgages," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 621-648.
  4. Sherrill Shaffer & James DiSalvo, 1991. "Conduct in a banking duopoly," Working Papers 91-12, Federal Reserve Bank of Philadelphia.
  5. Loretta J. Mester, . "Efficiency in the Savings and Loan Industry," Rodney L. White Center for Financial Research Working Papers 26-92, Wharton School Rodney L. White Center for Financial Research.
  6. Shaffer, Sherrill, 1996. " Evidence of Discrimination in Lending: An Extension," Journal of Finance, American Finance Association, vol. 51(4), pages 1551-54, September.
  7. Shaffer, Sherrill, 1993. "A Test of Competition in Canadian Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 49-61, February.
  8. Ferguson, Michael F & Peters, Stephen R, 1995. " What Constitutes Evidence of Discrimination in Lending?," Journal of Finance, American Finance Association, vol. 50(2), pages 739-48, June.
  9. Krol, Robert & Svorny, Shirley, 1996. "The effect of the bank regulatory environment on state economic activity," Regional Science and Urban Economics, Elsevier, vol. 26(5), pages 531-541, August.
  10. Jayaratne, Jith & Strahan, Philip E, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 639-70, August.
  11. Shaffer, Sherrill, 1993. "Can megamergers improve bank efficiency?," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 423-436, April.
  12. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  13. Alli Nathan & Edwin H. Neave, 1989. "Competition and Contestability in Canada's Financial System: Empirical Results," Canadian Journal of Economics, Canadian Economics Association, vol. 22(3), pages 576-94, August.
  14. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March.
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