Multiple-Bank Lending, Creditor Rights and Information Sharing
48 Pages Posted: 12 Feb 2009 Last revised: 18 Feb 2009
Date Written: February 16, 2009
When a customer can borrow from several competing banks, multiple lending raises default risk. If creditor rights are poorly protected, this contractual externality can generate novel equilibria with strategic default and rationing, in addition to equilibria with excessive lending or non-competitive rates. Information sharing among banks about clients' past indebtedness lowers interest and default rates, improves access to credit (unless the value of collateral is very uncertain) and may act as a substitute for creditor rights protection. If information sharing also allows banks to monitor their clients' subsequent indebtedness, the credit market may achieve full efficiency.
Keywords: information sharing, multiple-bank lending, creditor rights, seniority, non-exclusivity
JEL Classification: D73, K21, K42, L51
Suggested Citation: Suggested Citation