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Bank Competition and Credit Standards

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  • Martin Ruckes

Abstract

This article offers an explanation for the substantial variation of credit standards and price competition among banks over the business cycle. As the economic outlook improves, the average default probabilities of borrowers decline. This affects the profitability of screening and causes bank screening intensity to display an inverse U-shape as a function of economic prospects. Low screening activity in expansions creates intense price competition among lenders and loans are extended to lower-quality borrowers. As the economic outlook worsens, price competition diminishes, and credit standards tighten significantly. Deposit insurance may contribute to the countercyclical variation of credit standards. Copyright 2004, Oxford University Press.

Suggested Citation

  • Martin Ruckes, 2004. "Bank Competition and Credit Standards," The Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 1073-1102.
    • Handle: RePEc:oup:rfinst:v:17:y:2004:i:4:p:1073-1102
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    File URL: http://hdl.handle.net/10.1093/rfs/hhh011
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