Heterogeneous Banking Efficiency: Allocative Distortions and Lending Fluctuations

66 Pages Posted: 27 Nov 2013

Multiple version iconThere are 2 versions of this paper

Date Written: November 22, 2013

Abstract

This paper is a first attempt to connect the heterogeneity in bank efficiency with lending fluctuations and allocation efficiency : there is a trade-off between the two in the presence of heterogeneity in bank monitoring efficiency. The mechanism at hand is twofold. (a) First the rent extracted by the most efficient bank distorts incentives of entrepreneurs to undertake efforts. (b) Second banks specialising on contracts that do not include monitoring feature less cyclical fluctuations of aggregate lending. This has clear implications: (i) the presence of banking heterogeneity decreases firms’ average productivity as it increases adverse selection by entrepreneurs as well as favours rent extractions by banks; (ii) an individual bank featuring a lower cyclicality signals a lower efficiency in its monitoring abilities; (iii) a heterogeneous banking system featuring a lower cyclicality of aggregate lending might not be desirable as it may come along with allocative and incentives distortions.

Keywords: banking heterogeneity, moral hazard, adverse selection, endogenous market segmentation, allocation efficiency, lending cycle

JEL Classification: G21, E30

Suggested Citation

Duprey, Thibaut, Heterogeneous Banking Efficiency: Allocative Distortions and Lending Fluctuations (November 22, 2013). Banque de France Working Paper No. 464, Available at SSRN: https://ssrn.com/abstract=2360288 or http://dx.doi.org/10.2139/ssrn.2360288

Thibaut Duprey (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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