International Bank Lending to LDCs: An Information Based Approach

Prasanna S Gai

International Journal of Finance & Economics, 1997, vol. 2, issue 1, 59-71

Abstract: This paper develops an information-based theory of international bank lending that is compatible with the LDC debt story of the 1970s and 1980s and emphasises the importance of market structure as a factor contributing to financial crises. A feature of the market for sovereign loans, hitherto neglected, has been the leadership role played by a small group of major international "money-centre" banks and their subsequent influence over a much larger grouping of smaller, "regional" banks. Lending behaviour amongst such creditor heterogeneity is captured using a signaling model that takes into account the incomplete information environment created by sovereign risk. Our main finding is that the "herd-like" behaviour of the late 1970s and early 1980s may have, in part, been generated by large money-centre banks seeking to capitalize on their ability to influence the inferences and actions of their smaller rivals. Copyright @ 1997 by John Wiley & Sons, Ltd. All rights reserved.

Date: 1997
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