Flight to Quality or to Captivity: Information and Credit Allocation

Author/Editor:

Giovanni Dell'Ariccia ; Robert Marquez

Publication Date:

February 1, 2001

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Superior information exchanged over the course of lending relationships generates bank-client specificities to the extent that such information cannot be communicated credibly to outsiders. Consequently, banks obtain higher profits from more captured borrowers than from borrowers with financing alternatives. We refer to this as a “flight to captivity” effect. Negative shocks, associated with monetary contractions or foreign entry, cause a reallocation of bank credit away from more transparent borrowers and toward more opaque, more captured borrowers. The paper applies these ideas to the analysis of bank behavior in transition economies after financial liberalization and monetary policy contractions.

Series:

Working Paper No. 2001/020

Subject:

Bank credit Banking Credit Demand elasticity Economic theory Financial institutions Foreign banks Loans Money

English

Publication Date:

February 1, 2001

ISBN/ISSN:

9781451843842/1018-5941

Stock No:

WPIEA0202001

Pages:

25

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