Working Paper: CEPR ID: DP7186
Authors: Alberto Bennardo; Marco Pagano; Salvatore Piccolo
Abstract: When a customer can borrow from several competing banks, multiple lending raises default risk. If creditor rights are poorly protected, this contractual externality can generate novel equilibria with strategic default and rationing, in addition to equilibria with excessive lending or non-competitive rates. Information sharing among banks about clients' past indebtedness lowers interest and default rates, improves access to credit (unless the value of collateral is very uncertain) and may act as a substitute for creditor rights protection. If information sharing also allows banks to monitor their clients' subsequent indebtedness, the credit market may achieve full efficiency.
Keywords: Creditor Rights; Information Sharing; Multiple-Bank Lending; Non-Exclusivity; Seniority
JEL Codes: D73; K21; K42; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lack of information sharing (D82) | credit rationing (G21) |
| lack of information sharing (D82) | strategic default (G33) |
| information sharing (O36) | reduced interest rates (E43) |
| information sharing (O36) | reduced default rates (G33) |
| information sharing (O36) | improved access to credit (G21) |
| volatile collateral values (G13) | market collapse (G10) |
| creditor rights protection (G33) | lending behavior (G21) |
| creditor rights protection (G33) | default rates (E43) |