Moral Hazard and Capital Requirements in a Lending Model of Credit Denial

In this paper we analyze a repeated game in which an intermediary offers unsecured loans to entrepreneurs using future credit denial to induce repayment. To finance the loans, the intermediary uses a combination of equity capital and external funds. We focus on a moral hazard problem that emerges between the intermediary and the less informed external investors over a costly loan monitoring choice. The presence of informed borrowers in the lender’s portfolio turns out to act as a substitute for capital requirements. The result is that the lending strategy utilized by the intermediary minimizes the moral hazard problem but implies the intermediary’s balance sheet is fragile to exogenous risk.Moral hazard; Capital requirements; Bank regulation; Repayment incentives

Asymmetric Information and the Mode of Entry In Foreign Credit Markets

In a newly liberalized credit market, foreign banks with cost advantages are likely to be less informed than domestic banks that hold information on credit risks. These relative advantages may generate incentives for a foreign bank to negotiate acquisition of a domestic bank in order to capture information endowments. However, if it is difficult to assess the value of information held by banks, the foreign bank will face important choices about the optimal mode of entry and what acquisition price to pay. These choices have implications for the survival of domestic banks and how capital is allocated after liberalization.Foreign entry, bank competition, information

Group lending under asymmetric information

This paper examines joint liability loan contracts as part of a screening mechanism adopted by lenders using group lending schemes. A model and one-period game are introduced in order to analyze the type of optimal loan contracts that emerge when lenders have less information than borrowers. It is shown that under imperfect information, lenders may be able to utilize joint liability contracts as a. means of screening agent types by inducing endogenous group formation and self-selection among the borrowers. (C) 1999 Elsevier Science B.V. All rights reserved

Sharing credit information under endogenous costs

In this paper we study a model in which asymmetrically informed banks compete with one another to offer loans to entrepreneurs with risky projects. Banks are given an opportunity to share private credit information about their borrowers. The revealed information impacts both the bank’s repayment revenue as well as its costs, in terms of either the rate paid on debt and insurance, or the risk adjusted capital requirement. In this framework, we study how the interaction of repayment revenue and cost shape individual banks’ incentives to share information and in turn, how this explains the overall degree of information sharing in the economy.Information sharing; Bank competition; Market discipline

A Model of Mission Drift in Microfinance Institutions

In this paper we offer a theoretical examination of the phenomenon known as mission drift. In recent years there have been claims that the entry of large donors with deep pockets have led to a mission drift phenomenon, whereby microfinance institutions who were previously catering to the poorest agents have drifted towards catering to the less poor. We offer an explanation for how the change in the lending portfolio of a poverty minimizing microfinance institution might be linked to the phenomenon of increasing commercialization through the advent of these large profit oriented donors. The degree to which lending portfolios change turns out to be a function of both the supply of donor funds and the strategic interaction between heterogeneous microfinance institutions.microfinance; mission drift; poverty