Optimal Credit Limit Management Under Different Information Regimes

29 Pages Posted: 12 Oct 2003

See all articles by Markus Leippold

Markus Leippold

University of Zurich - Department of Banking and Finance; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Paolo Vanini

University of Basel

Silvan Ebnöther

Zurich Cantonal Bank

Date Written: February 2005

Abstract

Credit limit management is of paramount importance for successful short-term credit-risk management, even more so when the situation in credit and financial markets is tense. We consider a continuous-time model where the credit provider and the credit taker interact within a game-theoretic framework under different information structures. The model with complete information provides decision-theoretic insights into the problem of optimal limit policies and motivates more complicated information structures. Moving to a partial information setup, incentive distortions emerge that are not in the bank's interest. We discuss how these distortions can effectively be reduced by an incentive-compatible contract.

Keywords: Credit risk management, optimal limit policy, partial information, adverse selection

JEL Classification: G18, C19, G21, C69

Suggested Citation

Leippold, Markus and Vanini, Paolo and Ebnöther, Silvan, Optimal Credit Limit Management Under Different Information Regimes (February 2005). Available at SSRN: https://ssrn.com/abstract=451840 or http://dx.doi.org/10.2139/ssrn.451840

Markus Leippold (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Paolo Vanini

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Silvan Ebnöther

Zurich Cantonal Bank ( email )

Josefstrasse 222
CH-8000 Zurich
Switzerland

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