Relationship Banking, Monetary Policy, and Consumer Credit Reform

36 Pages Posted: 28 Nov 2007

See all articles by Bruce I. Carlin

Bruce I. Carlin

University of California, Los Angeles (UCLA) - Anderson School of Management

Rafael Rob

University of Pennsylvania - Department of Economics

Date Written: November 20, 2007

Abstract

The increasing dependence of American households on debt financing and the rising rates of personal bankruptcy raise several welfare considerations that we analyze in this paper. We pose a theoretical model of relationship banking to first evaluate how strategic actions between banks and borrowers yield interest rates for various credit types and drive credit rationing in the market. Based on these results, we evaluate several policies that the government may implement to influence lending policies in consumer credit markets. We derive conditions under which the government optimally wishes to induce credit rationing and show that under some conditions, it is welfare enhancing to encourage banks to have a liberal lending policy, even if it means that interest rates are exceedingly high for low credit quality borrowers. Finally, we analyze the effects that a credit rating agency has on the dynamics of this market. Our theoretical analysis is consistent with empirical observations from these markets, and has significant importance especially given the recent subprime mortgage financial crisis.

Keywords: Banking, Credit, Monetary Policy

JEL Classification: E58, E51, D11

Suggested Citation

Carlin, Bruce I. and Rob, Rafael, Relationship Banking, Monetary Policy, and Consumer Credit Reform (November 20, 2007). Available at SSRN: https://ssrn.com/abstract=1033108 or http://dx.doi.org/10.2139/ssrn.1033108

Bruce I. Carlin (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Rafael Rob

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-6775 (Phone)
215-573-2057 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
271
Abstract Views
984
rank
111,704
PlumX Metrics