A Dynamic Theory of Lending Standards

Author:

Fishman Michael J1,Parker Jonathan A2,Straub Ludwig3

Affiliation:

1. Kellogg School of Management, Northwestern University , USA

2. Sloan School of Management, MIT , USA and NBER

3. Harvard , USA and NBER

Abstract

Abstract We analyze a dynamic credit market where banks choose lending standards, modeled as costly effort to screen out bad borrowers. Tighter standards worsen the borrower pool, increasing banks’ incentives to employ tight standards in the future. This dynamic complementarity in lending standards can amplify and prolong downturns, decreasing lending and increasing credit spreads. Because lending standards have negative externalities, the market can converge to a steady state with inefficiently tight lending standards. We discuss the role of optimal policy to avoid this outcome as well as the impact of balance sheet costs on lending standards.

Publisher

Oxford University Press (OUP)

Reference37 articles.

1. Liquidity sentiments;Asriyan;American Economic Review,2017

2. Banking crises without panics;Baron;Quarterly Journal of Economics,2021

3. Cream-skimming in financial markets;Bolton;Journal of Finance,2016

4. Trading dynamics in decentralized markets with adverse selection;Camargo;Journal of Economic Theory,2014

Cited by 1 articles. 订阅此论文施引文献 订阅此论文施引文献,注册后可以免费订阅5篇论文的施引文献,订阅后可以查看论文全部施引文献

1. Correction to: A Dynamic Theory of Lending Standards;The Review of Financial Studies;2024-06-02

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