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Innovation in Banking and Excessive Loan Growth

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  • International Monetary Fund

Abstract

The volume of credit extended by a bank can be an informative signal of its abilities in loan selection and management. It is shown that, under asymmetric information, banks may therefore rationally lend more than they would otherwise in order to demonstrate their quality, thus negatively affecting financial system soundness. Small shifts in technology and uncertainty associated with new technology may lead to large jumps in equilibrium outcomes. Prudential measures and supervision are therefore warranted.

Suggested Citation

  • International Monetary Fund, 2008. "Innovation in Banking and Excessive Loan Growth," IMF Working Papers 2008/188, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2008/188
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    References listed on IDEAS

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    Cited by:

    1. Mr. Daniel C Hardy, 2012. "Bank Capitalization As a Signal," IMF Working Papers 2012/114, International Monetary Fund.

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