Loan Commitments and Credit Demand Uncertainty

Stuart Greenbaum, George Kanatas and Itzhak Venezia

University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA

Abstract: We provide an explanation for loan commitments unrelated to borrower credit-worthiness. In our model, banks can use loan commitments to reduce uncertainty regarding their own future funding needs. Given a cost advantage to banks that can acquire such information, there exists an equilibrium demand for commitments by risk-neutral firms. The purchase of the loan commitment and the choice of contract terms reveals the buyer's private information regarding future credit needs. In order to ensure the sorting of the a priori indistinguishable applicants according to their private information, we show that a usage fee applied to the commitment-holder's unused credit line is necessary.

Date: 1990-03-01
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