Imperfect Information Transmission from Banks to Investors: Macroeconomic Implications

34 Pages Posted: 2 Oct 2018 Last revised: 21 Oct 2019

See all articles by Nicolás Figueroa

Nicolás Figueroa

University of Chile

Oksana Leukhina

Federal Reserve Bank of St Louis

Carlos Ramírez

Board of Governors of the Federal Reserve System

Date Written: 2018-09-01

Abstract

We study the interaction of information production in loan-backed asset markets and credit allocation in a general equilibrium framework. Originating banks can screen their borrowers, but can inform investors of their asset type only through an error-prone rating technology. The premium paid on highly rated assets emerges as the main determinant of screening effort. Because the rating technology is imperfect, this premium is insufficient to induce the efficient level of screening. However, the fact that banks know their asset quality and produce ratings accordingly helps keep the premium high. Mandatory rating, certified review, and mandatory ratings disclosure policies interfere with this decision margin, thereby reducing informativeness of high ratings, lowering the premium paid on them, and exacerbating the credit misallocation problem. We perform optimal policy analysis.

Keywords: credit misallocation, information asymmetry, information production, screening effort, rising asset complexity, mandatory rating, mandatory ratings disclosure

JEL Classification: G01, G24, G28

Suggested Citation

Figueroa, Nicolás and Leukhina, Oksana and Ramírez, Carlos, Imperfect Information Transmission from Banks to Investors: Macroeconomic Implications (2018-09-01). FRB St. Louis Working Paper No. 2018-18. Available at SSRN: https://ssrn.com/abstract=3258968 or http://dx.doi.org/doi.org/10.20955/wp.2018.018

Nicolás Figueroa (Contact Author)

University of Chile ( email )

Pío Nono Nº1, Providencia
Santiago, R. Metropolitana 7520421
Chile

Oksana Leukhina

Federal Reserve Bank of St Louis ( email )

P.O. Box 442
St. Louis, MO 63166-0442
United States

Carlos Ramírez

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.carlosrc.com/

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