Financial Liberalization, Competition, and Bank Loan Quality

Posted: 29 Jun 2017

See all articles by Xiaofen Chen

Xiaofen Chen

Truman State University - Department of Economics

Date Written: March 05

Abstract

The paper studies the relationship between financial liberalization, characterized by removing entry restrictions, and bank loan quality. It shows that if a banking market is liberalized, the opportunity cost of screening loan applicants is driven lower by competition. Thus, a bank facing an entry threat is more likely to invest in screening instead of relying on collateral requirements. Removing entry restrictions may improve loan quality stability and reduce correlation between bank performance and asset price fluctuations.

Keywords: financial liberalization, banking competition, screening, loan quality

JEL Classification: G2, L1

Suggested Citation

Chen, Xiaofen, Financial Liberalization, Competition, and Bank Loan Quality (March 05). Journal of Economic Integration, Vol. 20, No. 1, 2005, Available at SSRN: https://ssrn.com/abstract=2994376

Xiaofen Chen (Contact Author)

Truman State University - Department of Economics ( email )

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