Interest Rates and Lending Standards

29 Pages Posted: 11 Jan 2017 Last revised: 18 Jun 2019

See all articles by Anastasios Dosis

Anastasios Dosis

ESSEC Business School; University of Cergy-Pontoise - THEMA

Multiple version iconThere are 2 versions of this paper

Date Written: June 17, 2019

Abstract

I study the effect of interest rates on banks' lending standards. I find that low (high) interest rates discourage (encourage) screening but facilitate (hinder) effort provision. Less screening, as a result of low interest rates, increases the likelihood of a banking crisis. I further show that (i) when interest rates are endogenous, the demand for loanable funds is non-monotonic and multiple equilibria arise, although higher interest-rate equilibria do not necessarily imply less lending, (ii) entrepreneurial overconfidence has a more profound effect when interest rates are high, and (iii) the effect of market structure on bank risk taking interestingly depends on the level of interest rates.

Keywords: Interest Rates; Lending; Screening; Moral Hazard; Risk Taking; Multiple Equilibria; Overconfidence

JEL Classification: D82; E30; E44; E58; G01; G21

Suggested Citation

Dosis, Anastasios, Interest Rates and Lending Standards (June 17, 2019). Available at SSRN: https://ssrn.com/abstract=2896286 or http://dx.doi.org/10.2139/ssrn.2896286

Anastasios Dosis (Contact Author)

ESSEC Business School

3 Avenue Bernard Hirsch
B.P 50105
Cergy - Pontoise Cedex, NA 95021
France

University of Cergy-Pontoise - THEMA ( email )

33 boulevard du port
F-95011 Cergy-Pontoise Cedex, 95011
France

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