DP7186 | Multiple-Bank Lending, Creditor Rights and Information Sharing

Publication Date

23/02/2009

JEL Code(s)

Keyword(s)

Programme Area(s)

Network(s)

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.