Loan-Portfolio Quality and the Diffusion of Technological Innovation

FDIC Working Paper No. 2004-02

33 Pages Posted: 3 Mar 2006

See all articles by Robert B. H. Hauswald

Robert B. H. Hauswald

American University - Department of Finance and Real Estate

Robert Marquez

University of California, Davis

Date Written: March 2004

Abstract

We study the economic forces that drive innovation in credit-risk assessment and the role of regulators in fostering technological progress. Recent regulatory proposals base capital-adequacy standards on banks' own internal systems and call for regulators to establish a set of best practices for the industry. We find that the dissemination of innovations mandated by this approach generates a tension between lowering aggregate banking-system risk ex post and providing banks with incentives to innovate ex ante. Moreover, this tension arises purely from regulatory concern for bank safety and not from any interest in promoting competition. We show that achieving the optimal level of innovation requires that regulators restrict the diffusion of technology. If regulators are unable to commit to specific dissemination policies, it may be beneficial to let banks assert intellectual property rights through, for instance, the patenting of their innovations.

JEL Classification: G21, L51, O31

Suggested Citation

Hauswald, Robert B.H. and Marquez, Robert S., Loan-Portfolio Quality and the Diffusion of Technological Innovation (March 2004). FDIC Working Paper No. 2004-02, Available at SSRN: https://ssrn.com/abstract=886722 or http://dx.doi.org/10.2139/ssrn.886722

Robert B.H. Hauswald (Contact Author)

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-1996 (Phone)
202-885-1946 (Fax)

Robert S. Marquez

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

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