Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- List of conference participants
- 1 Introduction
- 2 Efficient governance structure: implications for banking regulation
- Discussion
- 3 Bank loan maturity and priority when borrowers can refinance
- Discussion
- 4 Stock markets and resource allocation
- Discussion
- 5 Informational capacity and financial collapse
- Discussion
- 6 Financial intermediation and economic development
- Discussion
- 7 Creditor passivity and bankruptcy: implications for economic reform
- Discussion
- 8 Enterprise debt and economic transformation: financial restructuring in Central and Eastern Europe
- Discussion
- 9 Bank regulation, reputation and rents: theory and policy implications
- Discussion
- 10 Relationship banking, deposit insurance and bank portfolio choice
- Discussion
- 11 Competition and bank performance: a theoretical perspective
- Discussion
- Index
5 - Informational capacity and financial collapse
Published online by Cambridge University Press: 04 August 2010
- Frontmatter
- Contents
- List of figures
- List of tables
- Preface
- List of conference participants
- 1 Introduction
- 2 Efficient governance structure: implications for banking regulation
- Discussion
- 3 Bank loan maturity and priority when borrowers can refinance
- Discussion
- 4 Stock markets and resource allocation
- Discussion
- 5 Informational capacity and financial collapse
- Discussion
- 6 Financial intermediation and economic development
- Discussion
- 7 Creditor passivity and bankruptcy: implications for economic reform
- Discussion
- 8 Enterprise debt and economic transformation: financial restructuring in Central and Eastern Europe
- Discussion
- 9 Bank regulation, reputation and rents: theory and policy implications
- Discussion
- 10 Relationship banking, deposit insurance and bank portfolio choice
- Discussion
- 11 Competition and bank performance: a theoretical perspective
- Discussion
- Index
Summary
Introduction
The starting point for the work reported in this paper is the observation that banks are information-gathering and information-processing institutions. When a bank makes a loan, it investigates the borrowing firm's assets and business plan. It later acquires information in the course of handling the firm's accounts and conducting routine banking transactions. It observes the firm's repayment history. All of this information is proprietary and may be excluded from the public domain. When a bank fails, this information may be lost. Records may be destroyed or falsified and they may be hard to interpret when key personnel leave. One important consequence of bank failures may be the loss of information: borrowers with good credit histories may be forced to seek new sources of finance without the benefit of the information that has been accumulated over the years.
Even without a bank failure, there may be separations that lead to a similar type of information loss. When a bank decides to recall a loan, it may withdraw credit from good risks, forcing them to find new sources of credit on the open market. One reason for this apparently inefficient behaviour is an example of risk shifting. If the bank is in difficulties, it has an incentive to hold on to risky assets (loans) and liquidate safe assets, because it benefits from high returns and the depositors (or the deposit insurance system) bear the losses from low returns.
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- Information
- Capital Markets and Financial Intermediation , pp. 117 - 148Publisher: Cambridge University PressPrint publication year: 1993
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