Endogenous screening, credit crunches, and competition in laxity

Sherrill Shaffer and Scott Hoover

Review of Financial Economics, 2008, vol. 17, issue 4, 296-314

Abstract: A simple model of lending with endogenous screening predicts that risk-neutral banks tend to adopt tighter lending standards under several conditions commonly seen in recessions: lower interest rates (or spreads), higher default rates, or a smaller fraction of good borrowers. Historical data support these predictions. In addition, better information about borrower types encourages tighter lending standards, and competition in laxity can arise with multiple banks. Within the class of symmetric screening decisions, endogenizing the interest rates disrupts the existence of equilibrium in pure strategies, just as when screening decisions are assumed to be exogenous.

Keywords: G21; D81; Lending; Screening; Credit; crunches; Prisoner's; dilemma (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (4)

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Journal Article: Endogenous screening, credit crunches, and competition in laxity (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:revfin:v:17:y:2008:i:4:p:296-314

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