A Dynamic Theory of Lending Standards / Michael J. Fishman, Jonathan A. Parker, Ludwig Straub.

Format:

Book

Author/Creator:

Fishman, Michael J.

Contributor:

National Bureau of Economic Research.

Parker, Jonathan A.

Straub, Ludwig.

Series:

Working Paper Series (National Bureau of Economic Research) no. w27610.

NBER working paper series no. w27610

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

We develop a tractable dynamic model of credit markets in which lending standards and the quality of potential borrowers are endogenous. Competitive banks privately choose their lending standards: whether to pay a cost to screen out some unprofitable borrowers. Lending standards have negative externalities and are dynamic strategic complements: tighter screening worsens the future pool of borrowers for all banks and increases their incentives to screen in the future. Lending standards can amplify and prolong temporary downturns, affecting lending volume, credit spreads, and default rates. We characterize constrained-optimal policy which can generally be implemented as a government loan insurance program. When markets recover, they may do so only slowly, a phenomenon we call "slow thawing." Finally, we show that limits on lending such as from capital constraints naturally incentivize tight lending standards, further amplifying shocks to credit markets.

Notes:

Print version record

July 2020.