Flight to Quality or to Captivity: Information and Credit Allocation

By Giovanni Dell'Ariccia, Robert Marquez

February 1, 2001

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Giovanni Dell'Ariccia, and Robert Marquez. Flight to Quality or to Captivity: Information and Credit Allocation, (USA: International Monetary Fund, 2001) accessed November 8, 2024

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.

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

Keywords: Bank, Bank credit, Bank-client relationship, Bank-client specificity, Banking, Borrower, Borrower opaqueness, Competitor bank, Cost advantage, Cost of funds, Credit, Credit allocation, Customer, Demand elasticity, Foreign banks, Information, Loans, Quality borrower, WP

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2001/020
Stock No:

WPIEA0202001
ISBN:

9781451843842
ISSN:

1018-5941

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