Multiple-Bank Lending, Creditor Rights And Information Sharing

Multiple bank lending creates an incentive to over borrow and default. When creditor rights are poorly protected and collateral value is volatile, this incentive leads to rationing and non-competitive interest rates. If banks share information about past debts via credit reporting systems, the incentive to over borrow is mitigated: interest and default rates decrease; credit access improves if the value of collateral is not very volatile, but worsens otherwise. If credit reporting also allows banks to condition loans on clients' subsequent debts, rationing disappears and interest rates drop to the competitive level. These predictions square with the findings of recent empirical studies.

Provided by: University of Salerno Topic: Mobility Date Added: Jul 2010 Format: PDF

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