Lending Booms and Lending Standards

47 Pages Posted: 5 Aug 2005

See all articles by Giovanni Dell'Ariccia

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR)

Robert Marquez

University of California, Davis

Multiple version iconThere are 2 versions of this paper

Date Written: June 2005

Abstract

This paper examines how the informational structure of loan markets interacts with banks' strategic behavior in determining lending standards, lending volumes, and the aggregate allocation of credit. In a setting where banks obtain private information about their clients' creditworthiness, we show that banks may loosen lending standards when information asymmetries vis a vis other banks are low. In equilibrium this reduction in standards leads to a deterioration of banks' portfolios, a reduction in their profits, and an aggregate credit expansion. Furthermore, we show that although these low standards may increase aggregate surplus, they also increase the risk of financial instability. We, therefore, provide an explanation for the sequence of financial liberalization, lending booms, and banking crises that have occurred in many emerging markets.

Keywords: Banking competition, lending standards, asymmetric information

JEL Classification: D82, G21

Suggested Citation

Dell'Ariccia, Giovanni and Marquez, Robert S., Lending Booms and Lending Standards (June 2005). CEPR Discussion Paper No. 5095, Available at SSRN: https://ssrn.com/abstract=777785

Giovanni Dell'Ariccia (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

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Washington, DC 20431
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Robert S. Marquez

University of California, Davis ( email )

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Apt 153
Davis, CA 95616
United States

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