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Credit Rationing Effects of Credit Value-at-Risk

Jan Frederik Slijkerman (), David Smant () and Casper de Vries
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Jan Frederik Slijkerman: Faculty of Economics, Erasmus Universiteit Rotterdam

No 04-032/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Banks provide risky loans to firms which have superior information regarding the quality of their projects. Due to asymmetric information the banks face the risk of adverse selection. Credit Value-at-Risk (CVaR) regulation counters the problem of low quality, i.e. high risk, loans and therefore reduces the risk of the bank loan portfolio. However, CVaR regulation distorts the operation of credit markets. We show that a binding CVaR constraint introduces credit rationing and lowers social welfare. CVaR regulation also affects the operation of monetary policy.

Keywords: Credit rationing; Credit Value-at-Risk; asymmetric information; banks; regulation; loans (search for similar items in EconPapers)
JEL-codes: D45 D82 E43 G21 (search for similar items in EconPapers)
Date: 2004-03-15
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