Learning from a rival bank and lending boom

Research output: Contribution to journalArticle

21 Citations (Scopus)

Abstract

When bankers observe a rival winning in the interbank competition for lending to a firm, they infer that the firm may be more promising than they had thought. From this consideration, they loosen their creditworthiness tests and lower the interest rates they offer in the next lending competition for the firm. Increased interbank competition reduces the impact of this observational learning and decreases the credit risk taken by each bank because of a severe winner's curse, while it increases the aggregate risk taken by the entire banking sector.

Original languageEnglish
Pages (from-to)535-555
Number of pages21
JournalJournal of Financial Intermediation
Volume15
Issue number4
DOIs
Publication statusPublished - 2006 Oct 1
Externally publishedYes

Keywords

  • Financial liberalization
  • Interbank competition
  • Learning
  • Winner's curse

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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