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This paper is an attempt to define and explore the phenomenon of loan pushing in international lending in the 1970s. The earliest descriptions of loan pushing are anecdotal; this paper surveys the various facets that emerge from these anecdotes and suggests a possible definition that serves as the basis for a theoretical model. This model, inspired by the confessions of a banker, explores a triadic relationship between a corporation in the lender country, the lender bank, and a borrower in a developing country and suggests that a rational, profit maximizing commercial bank could end up pushing loans on to the borrower. Changes in international commercial banking in the 1970s that facilitated this type of loan pushing are discussed next. To the extent that the loan pushing doctrine is valid, it implies that the commercial banks were at least as responsible for the massive lending boom of the 1970s as the borrowers and should have been made to bear the cost of adjustment as well. The process of sovereign lending in the 1970s appears to consist of voluntary and mutually agreeable contracts between the transnational commercial banks and credit-seeking developing countries. The suggestion that there could be in this process an element of aggressiveness on the part of the commercial banks that actively and systematically pushed loans on to developing country borrowers, may at first sight, seem inconceivable. If a borrower voluntarily enters into a loan contract, he is obviously doing so because the contract is beneficial. If such is the case, then would it be correct to characterize the process as one of loan pushing? Also, the commercial banks are supposed to be rational profit maximizers. Thus, the amount of lending cannot be more than optimal. What then is meant by loan pushing? These are a few questions that immediately come to mind. It has been argued that international credit can contribute to increasing donor exports. (See, for instance, Winkler 1929; Hyson and Strout 1968; Gwynne 1983; Taylor 1985; Darity and Horn 1988; Basu 1991; Basu and Deshpande 1995.) This is indeed one of the arguments used to explain the phenomenon of loan pushing (however, not the only one). The aim of this paper is to explore the idea of loan pushing a little more deeply by first trying to understand the concept along with a brief review of the literature in the area (section 2). The confessions of a young banker (Gwynne 1983) provide the basis of the theoretical model (section 3), which considers a triadic relationship between a commercial bank in a creditor country, a debtor (nation), and a corporation in the creditor country and the compulsions of loan pushing arising

This paper provides empirical evidence on the economic value of services provided by independent auditors by analyzing whether auditor association leads to reduced interest rates on revolving credit agreements. Using multivariate regressions, we analyze the relation between interest rates on revolving bank loans to small, private firms and the degree of auditor association with the financial statements provided to the lender

Over 80 per cent of all commercial bank lending to corporations in the U.S. is done via bank loan commitments. Yet the authors have little empirical knowledge of loan commitment contracts. In this paper they describe the rich contractual structure of bank loan commitments based on data pertaining to over 2,500 contracts. The authors then develop a model which demonstrates that the observed complex structure of bank loan commitment contracts (which typically include multiple fee structures borrower-specific contracting variables, and the standard 'material adverse change clause') is important when the bank faces borrower adverse selection and moral hazard problems. Finally, the authors verify the robustness of their model by confronting its additional testable predictions with the data. Copyright 1997 by Ohio State University Press.

We investigate how banks' loan portfolio composition affects the timeliness of loan loss provisions and, thus, the relation between security returns and such provisions. We maintain that the timeliness of loss provisions relative to other information about loan default decreases as discretion over such provisions increases, and that discretion over loss provisions varies by loan type. Bank managers have more discretion over loss provisions for large and frequently renegotiated loans, e.g., foreign and commercial loans, than for small or infrequently renegotiated loans, e.g., consumer loans. Large size and the possibility of renegotiation provide rationales for banks to provide for losses on a loan-by-loan basis rather than by statistical analysis of historical data. Using the proportion of small or infrequently renegotiated loans as a measure of the timeliness of loan loss provisions, we hypothesize and find that both the sign of the market reaction to and the strength of the market anticipation of loan loss provisions differs by this timeliness measure.'

Driving Forces of Policy Loan Demand Previous research has found several variables related to the demand for life insurance policy loans, including market interest rates (Schott, 1971; Bykerk and Thompson, 1979; Cummins, 1973), personal income (Wood, 1964; Rejda, 1966), the unemployment rate (Cummins, 1973), and costs of alternative sources of credit (Day and Hendershott, 1977). Policy loans constitute a form of disintermediation for insurers and are important because they disrupt insurer cash flow and impose an opportunity cost if the market interest rate exceeds the policy loan interest rate.(1) This article assesses the impact that redesigned life insurance policy loan provisions and changes in financial markets have had on the demand for policy loans and the risk of disintermediation. The research extends previous work - which has focused exclusively on periods of fixed loan rates - by investigating policy loan demand from 1970 through 1989, a period encompassing both fixed and variable loan rates.(2) Because the structure of policy loan demand may have shifted over the sample period, a test for structural change is performed. While previous econometric analyses of policy loan demand have used quarterly data, this study uses monthly data. Market Conditions On policies issued before 1980, loan rates generally were fixed at between 5 and 6 percent. Thus, for various reasons, when market interest rates were equal to or in excess of policy loan rates, relatively more policyowners exercised their option to access cash values, and insurers lost the use of large amounts of assets. Policy loans outstanding at the end of 1970 equaled $14.1 billion and grew to $34.8 billion by the end of 1979. In response to the problem of policy loan disintermediation, a number of remedies have been proposed to reduce the outflow of funds. Wood and Rottman (1970) examine the use of variable loan rates, and Kraegel and Reiskytl (1977) and Larsen (1981) discuss the use of adjusted dividends to borrowing policyowners. In an effort to mitigate disintermediation, the National Association of Insurance Commissioners adopted the Model Policy Loan Interest Rate Bill in 1980. A version of this bill is now law in all states. According to the Model Bill, insurers may not set interest rates on policy loans in excess of Moody's Composite Yield on seasoned corporate bonds two months prior to the interest rate determination date. As interest rates decline, insurers must reduce the loan interest rate accordingly (see Black and Skipper, 1987, p. 140). Thus, since the early 1980s, a growing percentage of policy loan interest rates has been sensitive to market conditions. Of course, the shift to variable loan rates was not immediate; typically only new policies contained the variable rate provision. However, insurers offered inducements to fixed loan rate policyowners to switch to variable rate policies. The inducements generally took the form of increased projected dividends or dividend scales dependent upon loan utilization. In the early 1980s, insurers began to offer enhanced dividends to policyowners in exchange for higher policy loan rates or variable loan rates. New fixed loan rates were often raised to 8 percent (see Black and Skipper, 1987). It is likely that the introduction of interest-sensitive policy loan rates has altered the demand structure for policy loans in the last decade. Other factors may be responsible for a shift in the demand structure for policy loans. The volatility of interest rates might affect demand for policy loans because the flexible nature of policy loan repayment enables policyowners to repay loans without incurring the prepayment penalties often associated with other types of loans. The deregulation of financial markets, which allows greater access to money market returns, also may have led to a shift in the demand for policy loans. The introduction of nontraditional policies, such as universal life and variable life, that are said to be less loan tolerant, may have had an impact on the demand for policy loans. …

This paper provides an imperfect information explanation for the existence of bank loan commitments when both the bank and the potential borrower are risk neutral. The borrower is assumed to have access to a two-stage investment project wherein the investment required in the second stage is not known at the outset. The unknown investment requirement is revealed to the borrower, but not to the bank, at the beginning of the second stage. If the investor borrows at the beginning of the first stage, the realization at the beginning of the second stage might prompt a default in a situation where the project yields positive net present value. The reason is that the borrower does not regard the first-stage investment as a sunk cost. We show that a two-stage contract resembling a loan commitment can solve this under-investment problem.

This article develops a model of Swedish bank loans which includes "availability" effects and a maturity constraint on bank loan portfolios. The empirical results support the model and suggest that banks' liquidity affects both the size and the composition of their loan portfolios. In the postwar period there has been extensive discussion of the channels through which the central bank can affect the extension of credit by the banking system. Early work by Roosa on "availability" effects led to years of discussion of credit rationing in the U.S. In Sweden, Dahmen's (1952) work was almost exactly contemporaneous with Roosa's version of the availability theory, and both had the same principal purpose-to show that not all effects of monetary policy on loan supply proceeded through interest rates. Both analyses noted the significance of potential capital losses in banks' investment portfolios as a hindrance to loan expansion-indeed, this was for Roosa the principal means through which small movements of interest rates could give rise to substantial "availability" effects. Unfortunately, Roosa never did make clear why banks would ever use a non-interest-rate instrument for credit allocation rather than do the same job through adjustment of loan rates, and a large part of the later U.S. debate about credit rationing was devoted to analysis of this point.' In this respect Dahmen's analysis was more complete than Roosa's, for Dahmen emphasized that since banks prefer to maintain an overall balance between the liquidity of their assets and liabilities, they will in general react to a decline in the liquidity of their investments by adjusting the maturities as well as the rates on their loan portfolios in order to compensate, and thus

This paper develops a theoretical model in which collateral is a mechanism for enforcing loan contracts. Collateral functions in two ways in the model. First, default on a loan triggers the loss of collateral value to the borrower, where this value is stochastic at the time when the loan is negotiated. The assignment of collateral provides incentive for the borrower to repay the loan. Second, default implies that the property nght to the collateral is transferred to the lender. The lender valuation of collateral, which may diverge from the borrower valuation, is also stochastic at the time of loan negotiation. The relation of lender to borrower valuation plays an important role in the loan process. If, because of costs of collection and marketing, moral hazard problems, or other types of "transaction costs," the lender valuation is much below the borrower valuation, then the process of default will entail dead-weight losses. Interest rates charged on loans will reflect these losses-appropriately weighted by the probability of default-and the expected interest charge paid by the borrower will be correspondingly above the underlying, transaction-cost-free rate of return. The more important these costs associated with default, the greater would be the dead-weight losses incurred and the amount of (otherwise) profitable loan opportunities foregone. Section 1 sets out the basic model and discusses the expected interest costs from the viewpoint of the borrower. Section 2 introduces transaction costs associated with default, discusses the expected interest return from the viewpoint of the lender, and analyzes the maximum size loan that would be issued by lenders on the basis of a given "quantity" of collateral. Section 3 uses the assumption that the lending industry yields a competitive rate of return to analyze the determination of

This paper develops a normative model to analyze the hedging and fee-pricing decisions of a financial institution supplying fixed rate loan commitments to its customers. In supplying fixed rate loan commitments, the financial institution (hereafter referred to as "bank") is assumed to act as an agent that transforms commitment risk through the use of financial futures contracts. While most pre? vious loan commitment models have analyzed the interest rate (or price) risk the bank faces in supplying fixed rate loan commitments, they either have ignored or assumed away the loan take-down (or quantity) risk.l In general, by making a formal, fixed rate loan commitment, the bank exposes itself to both a price and a quantity risk. Specifically, a formal loan com? mitment prespecifies the maximum size of the loan, the purpose of the loan (of? ten project-specific) as well as the interest rate and fee to be paid by the borrower [14], [15]. However, while a formal loan commitment imposes a contractual re? quirement on the bank to supply funds, up to a maximum amount at an agreed rate of interest, the expected size of the loan to be taken down is often uncertain. The reason is that for project-specific lines of credit, the amount taken down will depend on the future state(s) of the world that are revealed to the borrower at the end of the commitment period as well as on the limitations and constraints im? posed on the use of funds in the loan commitment contract. For example, construction delays and other market imperfections that hamper a planned invest?

Libby [1975] evaluated the predictive ability of American bank loan officers by having a sample of loan officers predict failure/nonfailure for each of sixty real but disguised firms, half of which had experienced bankruptcy. He found loan officers to be reasonably accurate predictors of corporate failure, who exhibited a high degree of consensus in their responses to corporate financial profiles. He also found a consensus judge to be more accurate than most individuals. This paper extends Libby's study by considering the predictions of loan officers in a more representative task, which involved loan officers making annual predictions of failure of corporations based on a time series of ratios (Backer [1970, chap. 3] and Clemens and Dyer [1979, chap. 19]). The usefulness of students as surrogates for loan officers in experiments of this nature was also investigated. Since first writing this paper, I became aware of a similar study by Casey [1980], which is reported on pages 603-13 of this Journal. Casey provides some results which are inconsistent with Libby's and mine. In particular, he found that the majority of loan officers could not predict bankruptcy at a rate better than chance and that a consensus judge was outperformed by the majority of loan officers. Comparisons between the results of all three studies are discussed below. My study examined several issues relating to the failure/nonfailure predictions of loan officers. (a) The usefulness of accounting information

THIS STUDY constructs a commercial bank portfolio model based on expected profits maximization where there is uncertainty regarding future levels of deposits and other liabilities. Aggregate Federal Reserve data is used in the empirical sections. The model is presented in a dichotomized form: first, the trade-off between cash assets and earning assets is analyzed under the assumption that the earning assets are perfect substitutes; later, the model is expanded to include a wider breakdown of assets. Aside from expositional convenience, this approach enables the author in the earlier sections of the study to investigate a variety of issues commonly encountered in conventional money supply-money demand analysis. Among these are: (a) The question whether aggregate free reserves or its components, excess reserves and borrowed reserves, is the more appropriate behavioral variable both in theory and from the standpoint of convenience for empirical research. The study concludes in favor of free reserves, showing that if portfolio adjustments are rapid (and this is verified in a section of the study), borrowed reserves can be better predicted with an indirect method developed by the author which first uses a free reserve equation, then transforms predicted free reserves into predictions of borrowed reserves. (b) The functional form of the free reserve demand function. The functional form developed theoretically, and supported by a number of tests in this study, suggests that banks have tended to accelerate borrowing as the ratio of the Treasury bill rate to the discount rate approaches a value slightly greater than unity. This evidence is supplemented by tests of several implications of the theoretical demand curve, including the effects of the 1959-1960 change in Regulation D, and the significance of transaction costs (including a measure of the differences between country and city bank transaction costs). The author finds no evidence of "risk aversion"; rather it appears that banks, at least in the aggregate, managed their free reserves in such a way as to maximize the mathematical expectation of return. (c) The speed with which banks respond to unplanned flows of available funds and changes in interest rates. This study provides evidence that free reserves and other assets adjustments are far more rapid over periods as long as a quarter than has been concluded in much of the recent literature. A number of tests are also shown which belie the interpretation of free reserves as a cyclical buffer; the buffer function of free reserves appears to take place in a much shorter time interval. Expanding the assets categories, the author develops conditions under which expected profits maximization will lead to asset diversification. For the least "liquid" category considered, "nonprime" commercial loans, the model is useful for examination of the rationing hypothesis and the so-called "loan accommodation principle", under which banks are constrained by longer run profit considerations to grant loans upon demand to favored customers. The study offers tentative evidence that "nonprime" loans (nonprime commercial and other) are rationed by quantity rather than by other terms. On the other hand, loans to prime borrowers are shown to be financed by reductions in all other earning assets, most importantly nonprime commercial loans.

The small loan problem in the United States has many aspects. The term is so general and all-embracing as to call for more specific definition. To the legislator it is the riddle of checking extortionate charges for the use of money, and of building up safeguards for the borrower. To the lender it is a question of safe investment at a minimum of loss and a maximum of profit. To the necessitous borrower with a family it is the hard task of finding credit without thereby making himself worse off than before. If the topic is to be viewed from the angle of society as a whole, it will be needful to explore and interpret the economic and social setting which gives rise to cash borrowing and in which the transaction is carried out. That is the purpose of this article. It will be found necessary to inquire into the economic status of the borrower, both before and after the loan, but more particularly into the conditions which bring him to the lender. Unfortunately, the social consequences of his borrowing can be only guessed at, as research has revealed little in that sector of the problem. It is the borrower particularly who is the small loans public. He is the element in society upon which the operation of cash lending has its effect. While it is pertinent to inquire why and to what extent he borrows a small loan, the real question at the bottom of this topic is: "Must he borrow, and what does the borrowing do to him?"

IN "THE FEDERAL Home Loan Bank System and the Control of Credit" (Journal of Finance, XII [1957], 319-32), Gordon W. McKinley set forth an erroneous analysis in support of the view that there is little or no need for the monetary authorities to exercise greater control over savings intermediaries. The principal errors in his analysis can be demonstrated by reconsidering the three questions he sought to answer (p. 320). 1. Do commercial banks alone among private institutions have the ability to create money? Defining money as "anything which is normally, consistently, and generally used as a store of value and/or a medium of exchange" (p. 321), McKinley answered this question in the negative. What McKinley defined, however, is not money but assets. The unique property of money is that it serves as a store of value and as a medium of exchange. It is true that all stores of value which do not serve as means of payment are, in varying degrees, substitutes for holding money, but it is unnecessary and actually extirpatory of correct analysis to include these substitutes in the concept of money. If the concept of money is not restricted to those things serving as a medium of exchange, the concept of the velocity of the circulation of money, which McKinley misapprehended but did not abandon in his analysis, loses its significance. One can speak of time deposits, savings and loan shares, etc., as having a certain "rate of turnover," but this is not the same concept as the velocity of the circulation of money. Time deposits and other savings claims turn over against money. In the same sense one can speak of the rate of turnover of inventories, real estate, used cars, or any other non-money asset. The turnover of money and the turnover of time deposits, savings and loan shares, and other non-money assets are obverse phenomena. Savings intermediaries, including the savings departments of commercial banks, do exert a quantitative effect upon monetary magni

Any comment on present day opportunities for American banks in the small loan field might well be preceded by a sketchy review of pertinent historical events which have led us to this mid-way point in the twentieth century. Bank credit, in the modern sense, came into being in the twelfth century with the founding of the Bank of Venice, commonly referred to as the first public bank. Until the fifteenth century this bank and others in Italy catered almost exclusively to the wealthy class. To correct this condition the Franciscans helped create nonprofit organizations to lend money to individuals of modest means. Since little, if any, interest was charged, those organizations were operated on a charitable basis and as such many failed. However, these early experiences invited-and later established-the belief that a lender should receive compensation for service rendered and risk involved and a suitable charge was thereafter deemed legal and proper. Until the seventeenth century in Italy, the financing needs of the populace were only helped through the influence of the church, whereas in England laws designed to give relief from exorbitant rates were enforced by the reigning sovereigns. Thus the Bank of England, established in I694, subsequently became the bank for England and its colonies, and today is one of the leading financial institutions of the world. When the English colonists settled in America they brought many of the economic ideas of their native country and as early as the beginning of the nineteenth century it is recorded that several New York houses adopted the instalment system for furniture sales. The most rapid advances in this type of financing, however, have taken place in the last quarter century.