Single‐name Credit Risk, Portfolio Risk and Credit Rationing

Abstract

This paper introduces non-diversifiable risk in the Stiglitz-Weiss adverse selection model, so that an increase in the average riskiness of the borrower pool causes higher portfolio risk. This opens up the possibility of equilibrium credit rationing. Comparative statics analysis shows that an increase in risk aversion turns a two-price equilibrium into a rationing equilibrium. A two-price equilibrium is more inefficient than a rationing equilibrium, and a usury law that rules out the higher of the two interest rates can be welfare-improving. Contrary to the common result, the equilibrium may be characterized by over-investment.JEL classification: D82, E51, G21

Countercyclical capital rules for small open economies

“…Banks often use instruments other than interest rates to manage credit risk (Strahan 1999). This is particularly true when non-diversifiable risk exists on a banks' loan portfolio (Arnold et al, 2014). As a result, the observed lending rates do not fully reflect the availability of credit, a commonly used definition of credit rationing (Jaffee and Russell, 1976).…”

THE GLOBAL FINANCIAL CRISIS AND CAPITAL STRUCTURE DECISIONS OF TURKISH SMEs: A REVIEW

“…Secondly, considering capital and human resources, SMEs have insufficient production equipment. Lastly, the accounting system used by SMEs seems to be inadequate to get information on repayment capacity and profitability (Arnold et al, 2014). These aforementioned problems are observed particularly in Turkish SMEs.…”

“…Credit rationing occurs in two ways: firstly, despite that the claimant agrees to borrow with a high-interest rate, the lending institution still may not give any credit. Secondly, the institution may provide a credit level which is below the amount requested by the borrower (Arnold et al, 2014). Consequently, credit institutions prefer to ration credit instead of charging higher interest rates.…”

Financial Crises in DSGE Models: A Prototype Model

“…The incentives for engaging in non-price lending policies are stronger still if non-diversifiable risk exists in the loan portfolio, as shown e.g. by Arnold, Reeder, and Trepl (2010). There are two main implications for the behavior of credit market participants.…”