Monitoring and Commitment in Bank Lending Behavior

Author/Editor:

Rodolphe Blavy

Publication Date:

November 1, 2005

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:

The paper proposes a theoretical argument on the nature of bank lending, based on the idea that, through commitment and monitoring, banks overcome basic informational asymmetries with borrowers. By bringing together loan commitment theories and credit rationing theories, the paper shows that, within a framework of asymmetric information between lenders and borrowers and under costly termination of lending arrangements, commitment may explain the accumulation of nonperforming loans by banks. Two additional results follow: (i) that banks favor borrowers with well-known production functions and long-term credit history; and (ii) that interest rate spreads may be large if significant market imperfections prevail.

Series:

Working Paper No. 2005/222

Subject:

Bank credit Banking Credit Deposit rates Loans

English

Publication Date:

November 1, 2005

ISBN/ISSN:

9781451862416/1018-5941

Stock No:

WPIEA2005222

Pages:

34

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