Banks, Non Banks, and Lending Standards

Matthew Darst, Ehraz Refayet () and Alexandros Vardoulakis
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Ehraz Refayet: https://www.occ.gov/about/who-we-are/organizations/economics-department/meet-the-research-economists/bio-ehraz-refayet.html
Alexandros Vardoulakis: https://www.federalreserve.gov/econres/alexandros-vardoulakis.htm

No 2020-086, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study how competition between banks and non-banks affects lending standards. Banks have private information about some borrowers and are subject to capital requirements to mitigate risk-taking incentives from deposit insurance. Non-banks are uninformed and market forces determine their capital structure. We show that lending standards monotonically increase in bank capital requirements. Intuitively, higher capital requirements raise banks’ skin in the game and screening out bad projects assures positive expected lending returns. Non-banks enter the market when capital requirements are sufficiently high, but do not cause a deterioration in lending standards. Optimal capital requirements trade-off inefficient lending to bad projects under loose standards with inefficient collateral liquidation under tight standards.

Keywords: Lending standards; Credit cycles; Asymmetric information; Non-banks; Regulation (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Pages: 52 p.
Date: 2020-10-09
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ias and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2020-86

DOI: 10.17016/FEDS.2020.086

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