Micro-Prudential Regulation and Loan Monitoring

Norvald Instefjord () and Hiroyuki Nakata
Additional contact information
Norvald Instefjord: University of Essex

Journal of Financial Services Research, 2023, vol. 63, issue 3, No 4, 339-362

Abstract: Abstract We evaluate the value of loan monitoring systems for a bank controlled by a micro-prudential regulator. We investigate dynamic systems (an information channel that generates information flow about quality) and static systems (where the lender receives a single signal about loan quality). We find that dynamic systems carry a regulatory charge that dominates the benefit of the systems and are therefore unprofitable, whereas static systems have positive value. Specifically, lenders can profitably dismantle their dynamic systems and instead turn to static monitoring systems. The model reveals, therefore, a potential weakness of micro-prudential regulation.

Keywords: Credit scoring; Dynamic monitoring; Loan risk; Loan sales; Optimal stopping; Static monitoring (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10693-021-00376-7 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:jfsres:v:63:y:2023:i:3:d:10.1007_s10693-021-00376-7

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10693

DOI: 10.1007/s10693-021-00376-7

Access Statistics for this article

Journal of Financial Services Research is currently edited by Haluk Unal

More articles in Journal of Financial Services Research from Springer, Western Finance Association Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().