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An Economic Rationale for the Pricing Structure of Bank Loan Commitments

  • Anjan V. Thakor

    (Washington University in St. Louis)

  • Gregory F. Udell

    (New York University)

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.

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File URL: http://econwpa.repec.org/eps/fin/papers/0411/0411053.pdf
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Paper provided by EconWPA in its series Finance with number 0411053.

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Length: 19 pages
Date of creation: 30 Nov 2004
Date of revision:
Handle: RePEc:wpa:wuwpfi:0411053
Note: Type of Document - pdf; pages: 19
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
  2. Ramakrishnan, Ram T S & Thakor, Anjan V, 1984. "Information Reliability and a Theory of Financial Intermediation," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 415-32, July.
  3. Campbell, Tim S, 1978. "A Model of the Market for Lines of Credit," Journal of Finance, American Finance Association, vol. 33(1), pages 231-44, March.
  4. 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.
  5. Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
  6. 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.
  7. John G. Riley, 1976. "Informational Equilibrium," UCLA Economics Working Papers 071, UCLA Department of Economics.
  8. Riley, John G., 1975. "Competitive signalling," Journal of Economic Theory, Elsevier, vol. 10(2), pages 174-186, April.
  9. Hajime Miyazaki, 1977. "The Rat Race and Internal Labor Markets," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 394-418, Autumn.
  10. Engers, Maxim & Fernandez, Luis F, 1987. "Market Equilibrium with Hidden Knowledge and Self-selection," Econometrica, Econometric Society, vol. 55(2), pages 425-39, March.
  11. Milde, Hellmuth & Riley, John, 1984. "Signalling in credit markets," Discussion Papers, Series I 185, University of Konstanz, Department of Economics.
  12. 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.
  13. 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.
  14. Spence, Michael, 1978. "Product differentiation and performance in insurance markets," Journal of Public Economics, Elsevier, vol. 10(3), pages 427-447, December.
  15. 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 259-63, March.
  16. 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 925-40, September.
  17. 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.
  18. Bhattacharya, Sudipto, 1980. "Nondissipative Signaling Structures and Dividend Policy," The Quarterly Journal of Economics, MIT Press, vol. 95(1), pages 1-24, August.
  19. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
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