Overview

Asymmetric information significantly challenges bank lending behaviour by introducing uncertainty about borrowers’ creditworthiness (see Chapter 2 ), which in turn creates conditions for credit rationing (see Chapter 3 ). Trust, relational capital and regulation are critical mechanisms to mitigate the adverse effects of asymmetric information. Trust between the bank and the firm reduces perceived risk and facilitates smoother financial transactions, while relational capital, built through long-term interactions, provides banks with valuable proprietary information. As we will see, both trust and relational capital are strictly linked with relationship lending (see Chapter 4 ). Regulation and supervision by banking authorities can, in many ways, intervene to mitigate the negative effects of moral hazard and adverse selection (see Chapter 5 ) and help banks manage the ongoing “twin transition” towards digitalization and sustainability (see Chapter 6 ). Together, these elements enable banks to navigate informational asymmetries more effectively, thereby promoting better credit allocation and fostering economic stability.