Title:

Relationship Loans and Information Exploitability in a Competitive Market : Loan Commitments vs. Spot Loans, Working Paper 00-13

PREVIOUS | NEXT

Relationship Loans and Information Exploitability in a Competitive Market : Loan Commitments vs. Spot Loans, Working Paper 00-13

DATE: November 2000

PART OF: AUTHOR:

ABSTRACT: Despite the numerous benefits of loan commitments, only 79% of the commercial and industrial loans are made under commitment. I show that two factors limit the use of loan commitments. First, because banks commit themselves to lend, they carry costly liquidity reserves to meet their obligations. Due to liquidity costs, the interest rate on commitment loans is high relative to spot loans. Second, high interest rates trigger moral hazard. If the bank expects a profitable relationship in the future, it can absorb a portion of the liquidity costs to reduce the interest rate and attenuate moral hazard. If not, the borrower cannot get a loan commitment.

Download (pdf) View Full Text

Share this page:


Diversity is critical to the Federal Reserve, and we are firmly committed to fostering a diverse and inclusive culture throughout the Federal Reserve System. Collections within FRASER contain historical language, content, and descriptions that reflect the time period within which they were created and the views of their creators. Certain collections contain objectionable content—for example, discriminatory or biased language used to refer to racial, ethnic, and cultural groups. These viewpoints and attitudes are inconsistent with our values, but the original descriptions are retained to ensure that they are not erased from the historical record.
Save & Share
less

Ergungor, Ozgur Emre. "Relationship Loans and Information Exploitability in a Competitive Market : Loan Commitments vs. Spot Loans, Working Paper 00-13," Working Paper (Federal Reserve Bank of Cleveland) (November 2000). https://fraser.stlouisfed.org/title/4494/item/628336, accessed on April 15, 2024.

More Information
less

PUBLISHER: Federal Reserve Bank of Cleveland

PLACE: Cleveland

DIGITAL COPY SOURCE: Federal Reserve Bank of Cleveland

SUBJECTS: THEMES: CLASSIFICATION:
  • jel: G21
  • jel: D45

RIGHTS: In Copyright (InC)

Metadata (XML)
Metadata (JSON)