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Credit Rationing Effects of Credit Value-at-Risk

Author

Listed:
  • Jan Frederik Slijkerman

    (Faculty of Economics, Erasmus Universiteit Rotterdam)

  • David J.C. Smant

    (Faculty of Economics, Erasmus Universiteit Rotterdam)

  • Casper G. de Vries

    (Faculty of Economics, Erasmus Universiteit Rotterdam)

Abstract

Banks provide risky loans to firms which have superior information regarding the quality of their projects. Due to asymmetric information the banks face the risk of adverse selection. Credit Value-at-Risk (CVaR) regulation counters the problem of low quality, i.e. high risk, loans and therefore reduces the risk of the bank loan portfolio. However, CVaR regulation distorts the operation of credit markets. We show that a binding CVaR constraint introduces credit rationing and lowers social welfare. CVaR regulation also affects the operation of monetary policy.

Suggested Citation

  • Jan Frederik Slijkerman & David J.C. Smant & Casper G. de Vries, 2004. "Credit Rationing Effects of Credit Value-at-Risk," Tinbergen Institute Discussion Papers 04-032/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20040032
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    References listed on IDEAS

    as
    1. Thakor, Anjan V, 1996. "Capital Requirements, Monetary Policy, and Aggregate Bank Lending: Theory and Empirical Evidence," Journal of Finance, American Finance Association, vol. 51(1), pages 279-324, March.
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    6. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
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    More about this item

    Keywords

    Credit rationing; Credit Value-at-Risk; asymmetric information; banks; regulation; loans;
    All these keywords.

    JEL classification:

    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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