Loan Commitments and the Management of Uncertain Credit Demand

Stuart I Greenbaum, George Kanatas and Itzhak Venezia

The Journal of Real Estate Finance and Economics, 1991, vol. 4, issue 4, 66 pages

Abstract: The authors provide an explanation for loan commitments unrelated to borrower creditworthiness. In their model, banks can use loan commitments to reduce uncertainty regarding their own future funding needs. Given a cost advantage to banks that can acquire such information, there exists an equilibrium demand for commitments by risk-neutral firms. The purchase of the loan commitment and the choice of contract terms reveals the buyer's private information regarding future credit needs. In order to ensure the sorting of the a priori indistinguishable applicants according to their private information, they show that a usage fee applied to the commitment holder's unused credit line is necessary. Copyright 1991 by Kluwer Academic Publishers

Date: 1991
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