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Banking Competition and Soft Budget Constraints: How Market Power can threaten Discipline in Lending

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Listed:
  • Stefan Arping

    (University of Amsterdam)

Abstract

In imperfectly competitive credit markets, banks can face a tradeoff between exploiting their market power and enforcing hard budget constraints. As market power rises, banks eventually find it too costly to discipline underperforming borrowers by stopping their projects. Lending relationships become "too cozy", interest rates rise, and loan performance deteriorates.

Suggested Citation

  • Stefan Arping, 2012. "Banking Competition and Soft Budget Constraints: How Market Power can threaten Discipline in Lending," Tinbergen Institute Discussion Papers 12-146/IV/DSF49, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20120146
    as

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    File URL: https://papers.tinbergen.nl/12146.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Banking Competition; Soft Budget Constraint Problem; Moral Hazard;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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    This paper has been announced in the following NEP Reports:

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