Banking Competition and Soft Budget Constraints: How Market Power Can Threaten Discipline in Lending
University of Amsterdam Business School; Tinbergen Institute
December 19, 2012
Tinbergen Institute Discussion Paper 12-146/DSF49/IV
In imperfectly competitive credit markets, banks can face a tradeoff between exploiting their market power and enforcing hard budget constraints. As market power rises, banks eventually find it too costly to discipline underperforming borrowers by stopping their projects. Lending relationships become "too cozy", interest rates rise, and loan performance deteriorates.
Number of Pages in PDF File: 19
Keywords: Banking Competition, Soft Budget Constraint Problem, Moral Hazard
JEL Classification: G2, G3
Date posted: December 21, 2012
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