Screening, Cross-Border Banking and the Allocation of Credit

Thomas Gehrig

No 1973, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We analyse competition among banks when banks can use creditworthiness tests that generate (imperfect) information about borrowers. When banks can strategically adjust the test characteristics by investing resources in the screening technology, we show that credit markets are not easily contestable. An increase in the intensity of competition may have little effects on incumbents' conduct and overall market shares. Moreover, we provide conditions under which screening efforts are reduced by competition. In such situations the quality of the overall loan portfolio declines and the economy incurs higher aggregate risk due to the lower quality of banks' information production. The welfare gains from integrating fragmented loan markets can actually be negative.

Keywords: Banking Competition; Creditworthiness tests; Imperfect Information (search for similar items in EconPapers)
JEL-codes: D83 G21 L15 (search for similar items in EconPapers)
Date: 1998-09
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Citations: View citations in EconPapers (66)

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Journal Article: Screening, cross-border banking, and the allocation of credit (1998)
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