Do Loan Guarantees Alleviate Credit Rationing and Improve Economic Welfare?

Yu-Lin Wang; Chien-Hui Lee; Po-Sheng Ko

doi:10.3390/su12093922

Do Loan Guarantees Alleviate Credit Rationing and Improve Economic Welfare?

Sustainability ◽

10.3390/su12093922 ◽

2020 ◽

Vol 12 (9) ◽

pp. 3922

Author(s):

Yu-Lin Wang ◽

Chien-Hui Lee ◽

Po-Sheng Ko

Keyword(s):

High Risk ◽

Interest Rates ◽

Adverse Selection ◽

Social Cost ◽

Credit Rationing ◽

Economic Welfare ◽

Informational Asymmetry ◽

Collateral Constraint ◽

Loan Guarantees ◽

Credit Contracts

By designing credit contracts with inversely related interest rates and collateral, banks can overcome the problems of adverse selection and moral hazard when there is an informational asymmetry in competitive credit markets. One salient result points out that, if borrowers’ insufficient endowments of wealth cause a binding collateral constraint, a credit rationing equilibrium arises because of collateral’s inability to achieve perfect sorting. The purpose of this paper is to examine the consequences of government loan guarantees on equilibrium credit contracts and economic welfare. More specifically, the effects of loan guarantees on interest rates, collateral, and credit rationing were studied. Our results suggest that government loan guarantees should target high-risk entrepreneurs. Loan guarantees targeting high-risk entrepreneurs reduce a pledge of collateral in credit contracts, drop social cost, and increase economic welfare. Under the circumstances that borrowers’ insufficient wealth causes a binding collateral constraint, loan guarantees targeting high-risk entrepreneurs alleviate the problem of credit rationing and improve economic welfare.

Get full-text (via PubEx)

Lending standards, productivity, and credit crunches

Macroeconomic Dynamics ◽

10.1017/s1365100521000481 ◽

2021 ◽

pp. 1-26

Author(s):

Jonathan Swarbrick

Keyword(s):

Interest Rates ◽

Adverse Selection ◽

Macroeconomic Fluctuations ◽

Credit Crunch ◽

Financial Instability ◽

Macroeconomic Model ◽

Informational Asymmetry ◽

Lending Standards ◽

Loan Approval ◽

Screening Device

Abstract We propose a macroeconomic model in which adverse selection in investment amplifies macroeconomic fluctuations, in line with the prominent role played by the credit crunch during the financial crisis. Endogenous lending standards emerge due to an informational asymmetry between borrowers and lenders about the riskiness of borrowers. By using loan approval probability as a screening device, banks ration credit following increases in lending risk, generating large endogenous movements in TFP, explaining why productivity often falls during crises. Furthermore, the mechanism implies that financial instability is heightened when interest rates are low.

Get full-text (via PubEx)

AGENCY PROBLEM DALAM PENERAPAN PEMBIAYAAN AKAD MUDHARABAH PADA PERBANKAN SYARIAH

ALQALAM ◽

10.32678/alqalam.v33i1.384 ◽

2016 ◽

Vol 33 (1) ◽

pp. 46

Author(s):

Aswadi Lubis

Keyword(s):

High Risk ◽

Asymmetric Information ◽

Human Resources ◽

Moral Hazard ◽

Adverse Selection ◽

Agency Problem ◽

Agency Problems ◽

Islamic Banking ◽

The Public

The purpose of writing this article is to describe the agency problems that arise in the application of the financing with mudharabah on Islamic banking. In this article the author describes the use of the theory of financing, asymetri information, agency problems inside of financing. The conclusion of this article is that the financing is asymmetric information problems will arise, both adverse selection and moral hazard. The high risk of prospective managers (mudharib) for their moral hazard and lack of readiness of human resources in Islamic banking is among the factors that make the composition of the distribution of funds to the public more in the form of financing. The limitations that can be done to optimize this financing is among other things; owners of capital supervision (monitoring) and the customers themselves place restrictions on its actions (bonding).

Get full-text (via PubEx)

Sluggish adjustment of interest rates and credit rationing: an application of unit root testing and error correction modelling

Applied Economics ◽

10.1080/000368499324255 ◽

1999 ◽

Vol 31 (3) ◽

pp. 267-277 ◽

Cited By ~ 20

Author(s):

PETER WINKER

Keyword(s):

Interest Rates ◽

Error Correction ◽

Unit Root ◽

Credit Rationing ◽

Unit Root Testing

Get full-text (via PubEx)

Loan guarantee portfolios and joint loan guarantees with stochastic interest rates

The Quarterly Review of Economics and Finance ◽

10.1016/j.qref.2003.07.004 ◽

2006 ◽

Vol 46 (1) ◽

pp. 16-35 ◽

Cited By ~ 10

Author(s):

Chuang-Chang Chang ◽

San-Lin Chung ◽

Min-Teh Yu

Keyword(s):

Interest Rates ◽

Stochastic Interest Rates ◽

Loan Guarantee ◽

Stochastic Interest ◽

Loan Guarantees

Get full-text (via PubEx)

Loan Guarantee Portfolios and Joint Loan Guarantees with Stochastic Interest Rates

SSRN Electronic Journal ◽

10.2139/ssrn.313959 ◽

2002 ◽

Cited By ~ 1

Author(s):

Chuang-Chang Chang ◽

San-Lin Chung

Keyword(s):

Interest Rates ◽

Stochastic Interest Rates ◽

Loan Guarantee ◽

Stochastic Interest ◽

Loan Guarantees

Get full-text (via PubEx)

On equilibrium credit rationing and interest rates

Journal of Macroeconomics ◽

10.1016/0164-0704(95)80061-1 ◽

1995 ◽

Vol 17 (3) ◽

pp. 405-420 ◽

Cited By ~ 2

Author(s):

Jo Anna Gray ◽

Ying Wu

Keyword(s):

Interest Rates ◽

Credit Rationing

Get full-text (via PubEx)

Die Trägheit von Zinssätzen und Kreditrationierung in der Bundesrepublik Deutschland / The Sluggishness of Interest Rates and Credit Rationing in the Federal Republic of Germany

Jahrbücher für Nationalökonomie und Statistik ◽

10.1515/jbnst-1995-0205 ◽

1995 ◽

Vol 214 (2) ◽

Cited By ~ 1

Author(s):

Peter Winker

Keyword(s):

Interest Rates ◽

Federal Republic ◽

Error Correction ◽

Credit Rationing ◽

Price Setting ◽

Federal Republic Of Germany ◽

Monthly Data ◽

Long Run ◽

Short Run ◽

Marginal Price

SummaryCredit rationing is often considered as the outcome of asymmetric information between lenders and borrowers. The paper combines this aspect with a marginal price setting behavior of the banks. The resulting model describes adjustment processes between interbank rates, interest rates on deposits and on loans. Due to the non stationarity of the data, the model is estimated in error correction form allowing for distinguishing between short run dynamics and long run equilibrium. The derived hypothesis of a delayed adjustment of loan rates to changes in the interbank rates cannot be rejected with monthly data covering the sample 1975 to 1989.

Get full-text (via PubEx)

On the Possibility of Credit Rationing in the Stiglitz-Weiss Model

The American Economic Review ◽

10.1257/aer.99.5.2012 ◽

2009 ◽

Vol 99 (5) ◽

pp. 2012-2021 ◽

Cited By ~ 36

Author(s):

Lutz G. Arnold ◽

John G. Riley

Keyword(s):

Numerical Analysis ◽

Adverse Selection ◽

Joint Distribution ◽

Credit Rationing ◽

Selection Model ◽

High Rate ◽

Risk Class ◽

Loan Rate ◽

Expected Revenue ◽

Low Rate

Contrary to what is usually assumed, the expected revenue for lenders as a function of the loan rate cannot be globally hump-shaped in the Stiglitz-Weiss (1981) adverse selection model with a continuum of types. This has important implications. First, if there is credit rationing, there must be at least two equilibrium loan rates. Second, while at the low rate loans are rationed, all those applicants willing to pay the high rate are then served. Numerical analysis shows that unless the joint distribution of risk class and output is rather special, the two loan rate outcome with rationing is unlikely. (JEL D82, G21)

Get full-text (via PubEx)