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Pre-crisis credit standards: monetary policy or the savings glut?

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  • A. Penalver

Abstract

This paper presents a theoretical model of how banks set their credit standards. It examines how a monopoly bank sets its monitoring intensity in order to manage credit risk when it makes long duration loans to borrowers who have private knowledge of their project's stochastic profitability. In contrast to standard models, it has a recursive structure and a general equilibrium. The bank loan contract considered specifies the interest rate, the monitoring intensity and a profitability covenant. Within this class of contract, the bank chooses the terms which maximise steady-state profits subject to the constraint that it must have as many deposits as loans. The model is then used to consider whether the reduction in credit standards and credit spreads observed before the financial crisis could have been caused by low official interest rates or a positive deposit shock. The model rejects a risk-taking channel of monetary policy and endorses the savings glut hypothesis.

Suggested Citation

  • A. Penalver, 2014. "Pre-crisis credit standards: monetary policy or the savings glut?," Working papers 519, Banque de France.
    • Handle: RePEc:bfr:banfra:519
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    Cited by:

    1. Penalver, A., 2016. "What is responsible for the easing of credit standards before the crisis: monetary policy or the savings glut?," Rue de la Banque, Banque de France, issue 25, may..
    2. A. Penalver, 2016. "Optimal Monitoring of Long-Term Loan Contracts," Working papers 613, Banque de France.

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    More about this item

    Keywords

    credit standards; credit risk; monitoring; risk-taking channel; savings glut.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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