Wednesday, February 6, 2013
Banking Competition and Soft Budget Constraints: How Market Power Can Threaten Discipline in Lending
Posted by D. Daniel Sokol
Stefan Arping, University of Amsterdam - University of Amsterdam Business School; Tinbergen Institute has written on Banking Competition and Soft Budget Constraints: How Market Power Can Threaten Discipline in Lending.
ABSTRACT: In imperfectly competitive credit markets, banks can face a tradeoff between exploiting their market power and enforcing hard budget constraints. As market power rises, banks eventually find it too costly to discipline underperforming borrowers by stopping their projects. Lending relationships become "too cozy", interest rates rise, and loan performance deteriorates.