Relationship Banks, Debt Rollovers and Credit Crises
38 Pages Posted: 4 Apr 2012
Date Written: April 4, 2012
In deciding whether to roll over a loan, a relationship bank that has imperfect private information about its borrowers faces a trade-off. It wants to avoid rolling over a loan to a bad firm so as to safeguard its reputation as an effective monitor. However, refusing to roll over a loan to a good firm can provoke inefficient liquidation and cause losses to the relationship bank if the firm is unable to find alternative lenders. This paper explores the differential effects of this trade-off in situations with many alternative lenders (booms) and with few alternative lenders (credit crises), and explains how the results depend on factors such as the severity of a credit crisis, the strength of the firm-bank relationship and the firm debt structure.
Keywords: Debt rollover, Asymmetric information, Global games Relationship bank, Credit crisis
JEL Classification: G01, G21, G32, G33
Suggested Citation: Suggested Citation