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Banking Regulation and Collateral Screening in a Model of Information Asymmetry

Benjamin Hemingway

Journal of Financial Services Research, 2022, vol. 61, issue 3, No 3, 367-405

Abstract: Abstract This paper explores the impact of banking regulation on a competitive credit market with ex-ante asymmetric information and aggregate uncertainty. I construct a model where the government imposes a regulatory constraint that limits the losses banks make in the event of their default. I show that the addition of banking regulation results in three deviations from the standard theory. First, collateral is demanded of both high and low risk firms, even in the absence of asymmetric information. Second, if banking regulation is sufficiently strict, there may not exist an adverse selection problem. Third, a pooling Nash equilibrium can exist.

Keywords: Banking; Adverse selection; Collateral; Banking regulation; D86; G21; G28 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Working Paper: Banking regulation and collateral screening in a model of information asymmetry (2020) Downloads
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DOI: 10.1007/s10693-021-00357-w

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