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Endogenous screening, credit crunches, and competition in laxity

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  • Shaffer, Sherrill
  • Hoover, Scott

Abstract

A simple model of lending with endogenous screening predicts that risk-neutral banks tend to adopt tighter lending standards under several conditions commonly seen in recessions: lower interest rates (or spreads), higher default rates, or a smaller fraction of good borrowers. Historical data support these predictions. In addition, better information about borrower types encourages tighter lending standards, and competition in laxity can arise with multiple banks. Within the class of symmetric screening decisions, endogenizing the interest rates disrupts the existence of equilibrium in pure strategies, just as when screening decisions are assumed to be exogenous.

Suggested Citation

  • Shaffer, Sherrill & Hoover, Scott, 2008. "Endogenous screening, credit crunches, and competition in laxity," Review of Financial Economics, Elsevier, vol. 17(4), pages 296-314, December.
  • Handle: RePEc:eee:revfin:v:17:y:2008:i:4:p:296-314
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Gehrig, Thomas & Stenbacka, Rune, 2011. "Decentralized screening: Coordination failure, multiple equilibria and cycles," Journal of Financial Stability, Elsevier, pages 60-69.
    2. Natalie Tiernan & Pedro Gete, 2014. "Overlending and Macroprudential Tools," 2014 Meeting Papers 379, Society for Economic Dynamics.
    3. Adamuz, María de las Mercedes & Hernández Cortés, Janko, 2015. "Endogenous screening and the formation of loan syndicates," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 290-307.

    More about this item

    Keywords

    G21 D81 Lending Screening Credit crunches Prisoner's dilemma;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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