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Safety Nets Within Banks

  • Felgenhauer, Mike
  • Grüner, Hans Peter
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    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.

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    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6317.

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    Date of creation: May 2007
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    Handle: RePEc:cpr:ceprdp:6317
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