Tinbergen Institute Discussion Paper 12-146/DSF49/IV
19 Pages Posted: 21 Dec 2012
Date Written: December 19, 2012
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.
Keywords: Banking Competition, Soft Budget Constraint Problem, Moral Hazard
JEL Classification: G2, G3
Suggested Citation: Suggested Citation
Arping, Stefan, Banking Competition and Soft Budget Constraints: How Market Power Can Threaten Discipline in Lending (December 19, 2012). Tinbergen Institute Discussion Paper 12-146/DSF49/IV. Available at SSRN: https://ssrn.com/abstract=2191962 or http://dx.doi.org/10.2139/ssrn.2191962