Download this Paper Open PDF in Browser

Banking Competition and Soft Budget Constraints: How Market Power Can Threaten Discipline in Lending

Tinbergen Institute Discussion Paper 12-146/DSF49/IV

19 Pages Posted: 21 Dec 2012  

Stefan Arping

University of Amsterdam Business School; Tinbergen Institute

Date Written: December 19, 2012

Abstract

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

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

Stefan Arping (Contact Author)

University of Amsterdam Business School ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Paper statistics

Downloads
59
Rank
308,387
Abstract Views
372