IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2009-233.html
   My bibliography  Save this paper

Excessive Lending, Leverage, and Risk-Taking in the Presence of Bailout Expectations

Author

Listed:
  • Mr. Andréas Georgiou

Abstract

The financial crisis that began in 2007 has brought to the fore the issues of excesses in lending, leverage, and risk-taking as some of the fundamental causes of this crisis. At the same time, in dealing with the financial crisis there have been large scale interventions by governments, often referred to as bailouts of the lenders. This paper presents a framework where rational economic agents engage in ex ante excessive lending, borrowing, and risk-taking if creditors assign a positive probability to being bailed out. The paper also offers some thoughts on policy implications. It argues that it would be most productive for the long run if lending institutions were not bailed out. If the continuing existence of an institution was deemed essential, assistance should take the form of capital injections that dilute the equity of existing owners.

Suggested Citation

  • Mr. Andréas Georgiou, 2009. "Excessive Lending, Leverage, and Risk-Taking in the Presence of Bailout Expectations," IMF Working Papers 2009/233, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2009/233
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=23366
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jaffee, Dwight M & Modigliani, Franco, 1969. "A Theory and Test of Credit Rationing," American Economic Review, American Economic Association, vol. 59(5), pages 850-872, December.
    2. Gerhard Clemenz & Mona Ritthaler, 1992. "Credit markets with asymmetric information : a survey," Finnish Economic Papers, Finnish Economic Association, vol. 5(1), pages 12-26, Spring.
    3. Larry A. Sjaastad, 1983. "International Debt Quagmire — to Whom do We Owe It?," The World Economy, Wiley Blackwell, vol. 6(3), pages 305-324, September.
    4. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    5. Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 651-666.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Colignatus, Thomas, 2020. "Forum Theory & A National Assembly of Science and Learning," MPRA Paper 98568, University Library of Munich, Germany, revised 09 Feb 2020.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:bla:scotjp:v:49:y:2002:i:2:p:162-95 is not listed on IDEAS
    2. Weerawardane, Gayatri C., 1993. "Rationing in agricultural credit markets: evidence from Iowa farm operators," ISU General Staff Papers 1993010108000018158, Iowa State University, Department of Economics.
    3. Thakor, Anjan V., 1982. "Toward a theory of bank loan commitments," Journal of Banking & Finance, Elsevier, vol. 6(1), pages 55-83, March.
    4. Annie bellier & Wafa Sayeh & Stéphanie Serve, 2012. "What lies behind credit rationing? A survey of the literature," THEMA Working Papers 2012-39, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    5. LaDue, Eddy L. & Allen, Sandra, 1993. "Regulatory, Efficiency, and Management Issues Affecting Rural Financial Markets," Staff Papers 121348, Cornell University, Department of Applied Economics and Management.
    6. Duca, John V., 2013. "Did the commercial paper funding facility prevent a Great Depression style money market meltdown?," Journal of Financial Stability, Elsevier, vol. 9(4), pages 747-758.
    7. Allen Blackman, 2001. "Why don't Lenders Finance High-Return Technological Change in Developing-Country Agriculture?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(4), pages 1024-1035.
    8. Chan, Yuk-Shee & Thakor, Anjan V, 1987. "Collateral and Competitive Equilibria with Moral Hazard and Private Information," Journal of Finance, American Finance Association, vol. 42(2), pages 345-363, June.
    9. Kjenstad, Einar C. & Su, Xunhua & Zhang, Li, 2015. "Credit rationing by loan size: A synthesized model," The Quarterly Review of Economics and Finance, Elsevier, vol. 55(C), pages 20-27.
    10. Chala, Alemu Tulu & Forssbaeck, Jens, 2018. "Does Collateral Reduce Loan-Size Credit Rationing? Survey Evidence," Working Papers 2018:36, Lund University, Department of Economics.
    11. Scholten, Ulrich, 1999. "Die Förderung von Wohneigentum," Beiträge zur Finanzwissenschaft, Mohr Siebeck, Tübingen, edition 1, volume 8, number urn:isbn:9783161472343, September.
    12. Ibrahimo, M.V. & Barros, C.P., 2009. "Relevance or irrelevance of capital structure?," Economic Modelling, Elsevier, vol. 26(2), pages 473-479, March.
    13. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435, National Bureau of Economic Research, Inc.
    14. Clancy, Daragh & Merola, Rossana, 2017. "Countercyclical capital rules for small open economies," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 332-351.
    15. Karmelavičius, Jaunius & Mikaliūnaitė-Jouvanceau, Ieva & Petrokaitė, Austėja Petrokaitė, 2022. "Housing and credit misalignments in a two-market disequilibrium framework," ESRB Working Paper Series 135, European Systemic Risk Board.
    16. Milbradt, Konstantin & Oehmke, Martin, 2015. "Maturity rationing and collective short-termism," Journal of Financial Economics, Elsevier, vol. 118(3), pages 553-570.
    17. Abbassi, Puriya & Bräuning, Falk & Fecht, Falko & Peydró, José-Luis, 2014. "Cross-border liquidity, relationships and monetary policy: Evidence from the Euro area interbank crisis," Discussion Papers 45/2014, Deutsche Bundesbank.
    18. Dietmar Harhoff, 1998. "Are there Financing Constraints for R&D and Investment in German Manufacturing Firms," Annals of Economics and Statistics, GENES, issue 49-50, pages 421-456.
    19. Größl Ingrid & Stahlecker Peter, 2000. "Finanzierungsbedingungen und Güterangebot: Ein Überblick über finanzökonomische Ansätze und deren geldpolitische Konsequenzen," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 220(2), pages 223-250, April.
    20. Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012. "Macroeconomics with Financial Frictions: A Survey," Levine's Working Paper Archive 786969000000000384, David K. Levine.
    21. Juan Luis Vega, 1992. "El papel del crédito en el mecanismo de transmisión monetaria," Estudios Económicos, Banco de España, number 48.

    More about this item

    Keywords

    WP; lending institution;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:2009/233. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.