Theories of loan commitments: a literature review
A loan commitment is an agreement by which a bank promises to lend to a customer at prespecified terms while retaining the right to renege on its promise if the borrower's creditworthiness deteriorates. The contract also specifies the various fees that must be paid over the life of the commitment. Loan commitments are widely used in the economy. As their use has spread, a rich literature has evolved to explain why they exist, how they are priced, and how they affect the risk of the bank and the deposit insurer. This article summarizes what we have learned on these issues. Its main insight is that loan commitments are an optimal tool for risk sharing and for resolving informational problems. The author also points out some issues that the current literature leaves unexplained.
Volume (Year): (2001)
Issue (Month): Q III ()
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- Boot, Arnoud W. A., 2000. "Relationship Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 7-25, January.
- Robert B. Avery & Allen N. Berger, 1990.
"Loan commitments and bank risk exposure,"
9015, Federal Reserve Bank of Cleveland.
- Robert B. Avery & Allen N. Berger, 1989. "Loan commitments and bank risk exposure," Finance and Economics Discussion Series 65, Board of Governors of the Federal Reserve System (U.S.).
- Robert B. Avery & Allen N. Berger, 1988. "Loan commitments and bank risk exposure," Finance and Economics Discussion Series 36, Board of Governors of the Federal Reserve System (U.S.).
- Berkovitch, Elazar & Greenbaum, Stuart I., 1991. "The Loan Commitment as an Optimal Financing Contract," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(01), pages 83-95, March.
- Billett, Matthew T & Flannery, Mark J & Garfinkel, Jon A, 1995. " The Effect of Lender Identity on a Borrowing Firm's Equity Return," Journal of Finance, American Finance Association, vol. 50(2), pages 699-718, June.
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