Credit Rationing Effects of Credit Value-at-Risk

Topics:
Commercial Banking,
Commercial Lending
Tags:
Bank,
Erasmus University Rotterdam,
Financial Services,
Government,
Management,
Regulations,
Risk,
Strategy
Source:
Erasmus University Rotterdam

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Overview: Banks provide risky loans to firms which have superior information regarding the quality of their projects. Due to asymmetric information the banks face the risk of adverse selection. Credit Value-at-Risk (CVaR) regulation counters the problem of low quality, i.e. high risk, loans and therefore reduces the risk of the bank loan portfolio. However, CVaR regulation distorts the operation of credit markets. The paper shows that a binding CVaR constraint introduces credit rationing and lowers social welfare. CVaR regulation also affects the operation of monetary policy.

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Format: PDF | Size: 262KB | Date: Mar 2004 | Pages: 18

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