Single-name Credit Risk, Portfolio Risk and Credit Rationing

Lutz Arnold (), Johannes Reeder and Stefanie Trepl

Economica, 2014, vol. 81, issue 322, 311-328

Abstract: type="main" xml:id="ecca12075-abs-0001">

In the Stiglitz–Weiss (1981) adverse selection model, pure credit rationing cannot arise in equilibrium. We show that this is due to the fact that single-name risks are independent and a well-diversified portfolio contains no risk. We introduce non-diversifiable macroeconomic risk to the model and show that risk-averse lenders possibly ration credit. Welfare analysis shows that an interest rate ceiling is potentially welfare enhancing and that equilibrium overinvestment can occur.

Date: 2014
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Working Paper: Single-Name Credit Risk, Portfolio Risk, and Credit Rationing (2010)
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