Spillover Effects, Bank Lending and Growth

40 Pages Posted: 3 May 2004

See all articles by Sumru Altug

Sumru Altug

American University of Beirut - Faculty of Arts & Sciences; Koc University - Department of Economics

Murat Usman

Koc University - Department of Economics

Date Written: March 2004

Abstract

In this Paper, we examine bank lending decisions in an economy with spillover effects in the creation of new investment opportunities and asymmetric information in credit markets. We show that such features may lead to strategic considerations in the loan extension decision and in the pricing of loan contracts. We consider both lending and under-lending equilibria when the interest rate is exogenously given to banks. We show the existence of an asymmetric under-lending equilibrium in which productive investment projects do not get financed even if banks have adequate lending capacity. We also examine price-setting equilibria in which banks compete over interest rates charged to firms. We show that there exist price-setting equilibria in which all projects get financed if ex-post feasible. There also exists, however, an under-lending equilibrium in which when one bank does set a lower interest rate to capture a larger market, it may simultaneously reduce its lending. Our results suggest that volatility and unpredictability in bank lending capacities may be a key indicator of various adverse outcomes in our model.

Keywords: Bank lending, spillover effects, self-fulfilling beliefs, under-lending equilibria, interest rate competition

JEL Classification: C72, G21, O16

Suggested Citation

Altug, Sumru and Usman, Murat, Spillover Effects, Bank Lending and Growth (March 2004). Available at SSRN: https://ssrn.com/abstract=536165

Sumru Altug (Contact Author)

American University of Beirut - Faculty of Arts & Sciences ( email )

P.O.Box 11-0236 / (Department)
Beirut
Lebanon

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
Sariyer 34450, Istanbul
Turkey
(90 212) 338 1673 (Phone)
(90 212) 338 1651 (Fax)

Murat Usman

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
College of Administrative Sciences & Economics
Sariyer 80910, Istanbul
Turkey
+90 212 338 1553 (Phone)
+90 212 338 1653 (Fax)

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