The existence of non-price rationing in credit markets is a subj ect, not only of paramount importance, but of considerable controversy, which is ultimately linked with our understanding, or lack thereof, of the basic nature of the banking firm. A recognition of this phenomenon is critical to the understanding of the banking firm in its major role as a financial intermediary. The banking firm serves as an intermediary in two important spheres, between borrower and lender, and between spenders and the monetary authorities. The basic economic formulation of borrower-lender behavior, the simple Fisherian consumption loan model, while beautiful in its simplicity, fail s to acknowledge any role for a non-neutral financial intermediary. The bank, in its second intermediary role, leads one to question the assumption of both neoclassical and Keynsian monetary theories that monetary changes are diffused across the economy (the proverbial monetary helicopter). Monetary policy effects on spending and investment will clearly be biased by the policies of the banks. The major focus of the present work is the development of a theory of credit rationing based upon the existence of risk reducing information technologies. Implicit in the analysis is a discussion of the role of the banking firm as something more than a tr·aditional financial intermediary. The present analysis will focus on the bank as an intermediary between borrower and lender. It will be shown that in .
Table of Contents1 Summary.- 2 Background and Literature Review.- 2.1 The Availability Doctrine.- 2.2 The Early Theory.- 2.3 Information-Based Theories.- 2.4 Summary of Credit Rationing Theory.- 3 A Theory of Credit Rationing.- 3.1 A Model of Bank Operation and Loan Supply.- 3.1.1 Screening Technology.- 3.1.2 Collection Technology.- 3.1.3 Determination of the Base Default Probability.- 3.1.4 Bank Profit Function.- 3.1.5 Lender Contract Offers.- 3.1.6 Summary of the Bank Model.- 3.2 A Model of Borrower Behavior.- 3.2.1 The Default/Non Default Choice.- 3.2.2 Summary of the Borrower Model.- 3.3 Equilibrium in the Loan Market.- 3.3.1 A Single Contract “Pooling” Equilibrium.- 3.3.2 A Multiple-Contract Equilibrium.- 3.3.3 Summary of the Loan Market Equilibrium.- 3.4 The Role of Collateral in a Loan Contract.- 3.4.1 Lender Operations with Collateral.- 3.4.2 Borrower Behavior with Collateral.- 3.4.3 Collateral as a Signal.- 3.4.4 Equilibrium with Collateral.- 3.4.5 Summary of the Role of Collateral.- 3.5 Screening as a Signal.- 3.6 Summary of the Theory of Credit Rationing.- 4 Customer Relations.- 4.1 Background on Customer Relations Models.- 4.2 A Multi-Period Model.- 4.3 A Multi-Period Model with Changing Information.- 4.4 Summary of Customer Relations.- 5 Conclusions and Implications.- 5.1 Rationing in a General Equilibrium Framework.- 5.2 Regulatory Implications.- 5.3 Monetary Policy Implications.- 5.4 Summary.- References.