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Credit Availability and Capital Crunch: On the Role of the Heterogeneity of the Banking System

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  • OLIVIER BRUNO

Abstract

We analyze the impact of a credit crunch on aggregate investment via the heterogeneous structure of the banking system. We develop a model of endogenous credit allocation in which investors and two banks differ according to their level of capital and monitoring technology. In a context of moral hazard problem, we show that banks' cost advantage in the monitoring of small businesses must be compared to their relative amount of capital in order to explain firms' optimal choice of financing, the credit allocation in the economy and the asymmetric impact of a credit crunch on aggregate investment. A shock of the same magnitude on the two banks level of capital may have a different effect on total investment. We stress that the credit crunch is maximum when the shock hits the bank specialized in the financing of small businesses and when this bank is also the less capitalized. This result is supported by recent empirical studies (Hancock and Wilcox 1998).

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  • Olivier Bruno, 2009. "Credit Availability and Capital Crunch: On the Role of the Heterogeneity of the Banking System," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(2), pages 251-279, April.
    • Handle: RePEc:bla:jpbect:v:11:y:2009:i:2:p:251-279
    DOI: 10.1111/j.1467-9779.2009.01409.x
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    1. Akbar, Saeed & Rehman, Shafiq ur & Liu, Jia & Shah, Syed Zulfiqar Ali, 2017. "Credit supply constraints and financial policies of listed companies during the 2007–2009 financial crisis," Research in International Business and Finance, Elsevier, vol. 42(C), pages 559-571.
    2. Srdjan Marinkovic & Marko Malovic, 2012. "Serbian Credit Market After the Turmoil," Book Chapters, in: João Sousa Andrade & Marta C. N. Simões & Ivan Stosic & Dejan Eric & Hasan Hanic (ed.), Managing Structural Changes - Trends and Requirements, edition 1, volume 1, chapter 14, pages 278-302, Institute of Economic Sciences.
    3. Akbar, Saeed & Rehman, Shafiq ur & Ormrod, Phillip, 2013. "The impact of recent financial shocks on the financing and investment policies of UK private firms," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 59-70.

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