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Loan commitments and bank risk exposure

  • Robert B. Avery
  • Allen N. Berger

Loan commitments increase a bank's risk by obligating it to issue future loans under terms that it might otherwise refuse. However, moral hazard and adverse selection problems potentially may result in these contracts being rationed or sorted. Depending on the relative risks of the borrowers who do and do not receive commitments, commitment loans could be safer or riskier on average than other loans. the empirical results indicate that commitment loans tend to have slightly better than average performance, suggesting that commitments generate little risk or that this risk is offset by the selection of safer borrowers.

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File URL: http://www.clevelandfed.org/research/Workpaper/1990/wp9015.pdf
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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9015.

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Date of creation: 1990
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Handle: RePEc:fip:fedcwp:9015
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  1. Robert B. Avery & Allen N. Berger, 1990. "Loan commitments and bank risk exposure," Working Paper 9015, Federal Reserve Bank of Cleveland.
  2. Melnik, Arie & Plaut, Steven E., 1986. "The economics of loan commitment contracts: Credit pricing and utilization," Journal of Banking & Finance, Elsevier, vol. 10(2), pages 267-280, June.
  3. Sofianos, George & Wachtel, Paul & Melnik, Arie, 1990. "Loan commitments and monetary policy," Journal of Banking & Finance, Elsevier, vol. 14(4), pages 677-689, October.
  4. Anjan V. Thakor & Gregory F. Udell, 2004. "An Economic Rationale for the Pricing Structure of Bank Loan Commitments," Finance 0411053, EconWPA.
  5. Boot, Arnoud W. A. & Thakor, Anjan V. & Udell, Gregory F., 1991. "Credible commitments, contract enforcement problems and banks: Intermediation as credibility assurance," Journal of Banking & Finance, Elsevier, vol. 15(3), pages 605-632, June.
  6. Ham, John C & Melnik, Arie, 1987. "Loan Demand: An Empirical Analysis Using Micro Data," The Review of Economics and Statistics, MIT Press, vol. 69(4), pages 704-09, November.
  7. Arnoud Boot & Anjan V. Thakor & Gregory F. Udell, 2004. "Competition, Risk Neutrality and Loan Commitments," Finance 0411051, EconWPA.
  8. Reuven Glick and Steven E. Plaut., 1988. "Money and Off-Balance-Sheet Liquidity: An Empirical Analysis," Research Program in Finance Working Papers 182, University of California at Berkeley.
  9. James, Christopher, 1982. " An Analysis of Bank Loan Rate Indexation," Journal of Finance, American Finance Association, vol. 37(3), pages 809-25, June.
  10. Gary D. Koppenhaver, 1987. "The effects of regulation on bank participation in the guarantee market," Staff Memoranda 87-6, Federal Reserve Bank of Chicago.
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