An Economic Rationale for the Pricing Structure of Bank Loan Commitments
An economic rationale is provided for the competitive equilibrium deployment of commitment and usage fees in loan commitment pricing. It is shown that, under perfect information, assessing both fees rather than just one permits optimal risk sharing. When the borrower is privately informed about its probability of future commitment utilization, commitment and usage fees can be used to induce borrowers to identify themselves by self-selection through contract choice. The equilibrium characterized here is dissipative and thus raises the usual existence questions which are addressed in the paper.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Besanko, David & Thakor, Anjan V., 1987.
"Competitive equilibrium in the credit market under asymmetric information,"
Journal of Economic Theory,
Elsevier, vol. 42(1), pages 167-182, June.
- David Besanko & Anjan V. Thakor, 2004. "Competitive Equilibrium in the Credit Market under Asymmetric Information," Finance 0411045, EconWPA.
- Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
- Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-419, June.
- Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
- John H. Boyd & Edward C. Prescott, 1985. "Financial intermediary-coalitions," Staff Report 87, Federal Reserve Bank of Minneapolis.
- Deshmukh, Sudhakar D & Greenbaum, Stuart I & Kanatas, George, 1982. " Bank Forward Lending in Alternative Funding Environments," Journal of Finance, American Finance Association, vol. 37(4), pages 925-940, September.
- Milde, Hellmuth & Riley, John, 1984. "Signalling in credit markets," Discussion Papers, Series I 185, University of Konstanz, Department of Economics.
- Hajime Miyazaki, 1977. "The Rat Race and Internal Labor Markets," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 394-418, Autumn.
- James, Christopher, 1981. "Self-Selection and the Pricing of Bank Services: an Analysis of the Market for Loan Commitments and the Role of Compensating Balance Requirements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(05), pages 725-746, December.
- Campbell, Tim S, 1978. "A Model of the Market for Lines of Credit," Journal of Finance, American Finance Association, vol. 33(1), pages 231-244, March.
- Sudipto Bhattacharya, 1980. "Nondissipative Signaling Structures and Dividend Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 95(1), pages 1-24.
- Arvan, Lanny & Brueckner, Jan K, 1986. "Efficient Contracts in Credit Markets Subject to Interest Rate Risk: AnApplication of Raviv's Insurance Model," American Economic Review, American Economic Association, vol. 76(1), pages 259-263, March.
- Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 629-649.
- Riley, John G., 1975. "Competitive signalling," Journal of Economic Theory, Elsevier, vol. 10(2), pages 174-186, April.
- John G. Riley, 1974. "Competitive Signalling," UCLA Economics Working Papers 050, UCLA Department of Economics.
- Riley, John G, 1979. "Informational Equilibrium," Econometrica, Econometric Society, vol. 47(2), pages 331-359, March.
- John G. Riley, 1976. "Informational Equilibrium," UCLA Economics Working Papers 071, UCLA Department of Economics.
- Engers, Maxim & Fernandez, Luis F, 1987. "Market Equilibrium with Hidden Knowledge and Self-selection," Econometrica, Econometric Society, vol. 55(2), pages 425-439, March.
- Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
- Sealey, C. Jr. & Heinkel, Robert, 1985. "Asymmetric information and a theory of compensating balances," Journal of Banking & Finance, Elsevier, vol. 9(2), pages 193-205, June.
- Ho, Thomas S. Y. & Saunders, Anthony, 1983. "Fixed Rate Loan Commitments, Take-Down Risk, and the Dynamics of Hedging with Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(04), pages 499-516, December.
- Ram T. S. Ramakrishnan & Anjan V. Thakor, 1984. "Information Reliability and a Theory of Financial Intermediation," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 415-432.
- Spence, Michael, 1978. "Product differentiation and performance in insurance markets," Journal of Public Economics, Elsevier, vol. 10(3), pages 427-447, December. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0411053. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.