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Banking regulation and collateral screening in a model of information asymmetry

Benjamin Hemingway

No 73, Bank of Lithuania Working Paper Series from Bank of Lithuania

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 to impose 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 (search for similar items in EconPapers)
JEL-codes: D86 G21 G28 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2020-02-18
New Economics Papers: this item is included in nep-ban
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Journal Article: Banking Regulation and Collateral Screening in a Model of Information Asymmetry (2022) Downloads
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