Bank Credit Cycles

Gary Gorton and Ping He

No 11363, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Private information about prospective borrowers produced by a bank can affect rival lenders due to a "winner's curse" effect. Strategic interaction between banks with respect to the intensity of costly information production results in endogenous credit cycles, periodic "credit crunches." Empirical tests are constructed based on parameterizing public information about relative bank performance that is at the root of banks' beliefs about rival banks' behavior. Consistent with the theory, we find that the relative performance of rival banks has predictive power for subsequent lending in the credit card market, where we can identify the main competitors. At the macroeconomic level, we show that the relative bank performance of commercial and industrial loans is an autonomous source of macroeconomic fluctuations. We also find that the relative bank performance is a priced risk factor for both banks and nonfinancial firms. The factor-coefficients for non-financial firms are decreasing with size.

JEL-codes: E3 G2 (search for similar items in EconPapers)
Date: 2005-05
New Economics Papers: this item is included in nep-mac
Note: CF ME
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Citations: View citations in EconPapers (13)

Published as Gorton & Ping He, 2008. "Bank Credit Cycles," Review of Economic Studies, Blackwell Publishing, vol. 75(4), pages 1181-1214, October.

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