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Using Behavioral Economics to Analyze Credit Policies in the Banking Industry

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  • David Peón
  • Anxo Calvo

Abstract

2008 world financial meltdown highlighted significant shortcomings on procedures used by the banking sector to provide credit to the real economy. A long period of indulgence granting personal loans and mortgages that boosted a credit bubble all over the world has been followed by an era of suspicion within the banking sector, precipitating the liquidity crunch and the credit squeeze to private agents. Behavioral Finance has emerged as an alternative approach to analyze efficiency on financial markets, revealing a world with less than fully rational investors and arbitrageurs limited by risk aversion, short time horizons and agency problems. In this paper we consider the possibility to extend Behavioral Finance topics such as investor sentiment, overconfidence, heuristics or herd instinct to analyze banks behavior when providing credit to private agents, and how the absence of arbitrageurs in the credit market could justify the role of public banking as a countercyclical policy maker.

Suggested Citation

  • David Peón & Anxo Calvo, 2012. "Using Behavioral Economics to Analyze Credit Policies in the Banking Industry," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 145-160.
    • Handle: RePEc:ers:journl:v:xv:y:2012:i:3:p:145-160
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    File URL: http://www.ersj.eu/repec/ers/papers/12_3_p8.pdf
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    References listed on IDEAS

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    Cited by:

    1. ABOU EL HASSAN Mohamad, 2022. "The Need for Reform of Financial Markets in Times of Crisis in Emerging Economies: The Case of Lebanon," European Journal of Interdisciplinary Studies, Bucharest Economic Academy, issue 01, March.

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    More about this item

    Keywords

    Credit bubbles; EMH; banking efficiency; behavioral finance; limits of arbitrage;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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