Credit Rationing Effects of Credit Value-at-Risk
Tinbergen Institute Discussion Paper No. 2004-032/2
18 Pages Posted: 22 Mar 2004
Date Written: March 12, 2004
Abstract
Banks provide risky loans to firms, which have superior information regarding the quality of their projects. Due to asymmetric information the banks face the risk of adverse selection. Credit Value-at-Risk (CVaR) regulation counters the problem of low quality, i.e. high risk, loans and therefore reduces the risk of the bank loan portfolio. However, CVaR regulation distorts the operation of credit markets. We show that a binding CVaR constraint introduces credit rationing and lowers social welfare. CVaR regulation also affects the operation of monetary policy.
Keywords: Credit rationing, Credit Value-at-Risk, asymmetric information, banks, regulation, loans
JEL Classification: D45, D82, E43, G21
Suggested Citation: Suggested Citation