1. Learning from a rival bank and lending boom
- Author
-
Yoshiaki Ogura
- Subjects
Economics and Econometrics ,Curse ,Interbank competition ,media_common.quotation_subject ,Financial liberalization ,International economics ,Monetary economics ,Boom ,Interest rate ,Competition (economics) ,Winner's curse ,Systematic risk ,Economics ,Observational learning ,Learning ,Finance ,media_common ,Credit risk - Abstract
When bankers observe a rival winning in the interbank competition for lending to a firm, they infer that the firm may be more promising than they had thought. From this consideration, they loosen their creditworthiness tests and lower the interest rates they offer in the next lending competition for the firm. Increased interbank competition reduces the impact of this observational learning and decreases the credit risk taken by each bank because of a severe winner's curse, while it increases the aggregate risk taken by the entire banking sector.
- Published
- 2006