Loan commitments and bank risk exposure

doi:10.1016/0378-4266(91)90045-N

Journal of Banking & Finance

Volume 15, Issue 1, February 1991, Pages 173-192

https://doi.org/10.1016/0378-4266(91)90045-N Get rights and content

Abstract

Loan commitments increase a bank's risk by obligating it to issue future loans under terms it might otherwise refuse. However, moral hazard and adverse selection problems may result in these contracts being rationed or sorted. Depending on the relative risks of the borrowers who do and do not receive commitments, commitment loans could be safer or riskier on average than other loans. The empirical results indicate that commitment loans tend to have slightly better than average performance, suggesting that either commitments generate little risk or that this risk is offset by the selection of safer borrowers to receive commitments.

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^∗: The opinions expressed do not necessarily reflect those of the Board of Governors or its staff. The authors would like to thank Sally Davies for indispensable help in developing and refining the ideas in this paper and George Sofianos for an excellent discussion of an earlier draft. The authors also thank the anonymous referees, Mitch Berlin, Tom Brady, Fred Jensen, Pat Parkinson Rich Rosen, Anjan Thakor, and Greg Udell for very helpful comments, and Aliki Antonatos, Pat Ma, and Oscar Barnhardt for research assistance.

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Loan commitments and bank risk exposure

Abstract

Journal of Banking and Finance

Journal of Banking and Finance