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Safety Nets Within Banks

Author

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  • Grüner, Hans Peter
  • Felgenhauer, Mike

Abstract

We study how banks should protect their credit departments against the external influence from potential borrowers. We analyze four mechanisms that are widespread in practice: a credit board with unanimity or simple majority, a hierarchy and an advisory system. A bank faces a trade-off between the quality of information aggregation and the effectiveness of barriers against external influence. We provide a ranking of the different schemes. Some of them are equivalent even though the credit managers' decision power differs. In large credit decisions, banks should sacrifice on the quality of information aggregation in order to better protect the decision making process from outside influence.

Suggested Citation

  • Grüner, Hans Peter & Felgenhauer, Mike, 2007. "Safety Nets Within Banks," CEPR Discussion Papers 6317, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:6317
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Hierarchies; Lobbying; Voting rules;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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