Forbearance lending and soft budget constraints in a model of multiple heterogeneous bank financing
Empirical evidence suggests that banks often engage in refinancing of intrinsically insolvent debtors instead of writing of their non-performing loans. Such forbearance lending may induce soft budget constraints for the debtors, as it diminishes their incentives to thwart default. This paper introduces a model of coordination failure to analyze how a relationship bank affects the incidence of forbearance lending and soft budget constraints by signaling its credit decision to other creditors. We find that the relationship bank's signaling ability enhances its incentives to engage in forbearance lending and infuences the conditions under which debtors face soft budget constraints.
|Date of creation:||2006|
|Date of revision:|
|Contact details of provider:|| Postal: Keplerstr. 17, 72074 Tübingen|
Web page: http://www.uni-tuebingen.de/en/faculties/wirtschafts-und-sozialwissenschaftliche-fakultaet/faecher/wirtschaftswissenschaft.html
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:zbw:tuedps:303. 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: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.