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Bank Credit Cycles

  • Gary Gorton
  • Ping He

Private information about prospective borrowers produced by a bank can affect rival lenders due to a "winner%u2019s curse" effect. Strategic interaction between banks with respect to the intensity of costly information production results in endogenous credit cycles, periodic "credit crunches." Empirical tests are constructed based on parameterizing public information about relative bank performance that is at the root of banks%u2019 beliefs about rival banks%u2019 behavior. Consistent with the theory, we find that the relative performance of rival banks has predictive power for subsequent lending in the credit card market, where we can identify the main competitors. At the macroeconomic level, we show that the relative bank performance of commercial and industrial loans is an autonomous source of macroeconomic fluctuations. We also find that the relative bank performance is a priced risk factor for both banks and nonfinancial firms. The factor-coefficients for non-financial firms are decreasing with size.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11363.

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Date of creation: May 2005
Date of revision:
Publication status: published as Gorton & Ping He, 2008. "Bank Credit Cycles," Review of Economic Studies, Blackwell Publishing, vol. 75(4), pages 1181-1214, October.
Handle: RePEc:nbr:nberwo:11363
Note: CF ME
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