Financial Liberalization, Competition, and Bank Loan Quality
Posted: 29 Jun 2017
Date Written: March 05
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: Suggested Citation