Model Of Lending Research Articles

Debt with potential repudiation

Lending across national boundaries is different from lending within national boundaries because of the difficulty of imposing legal sanctions. This paper examines a simple model of international lending where the borrower can repudiate, without legal sanction, if this is to his advantage. The model has an infinite time horizon and it is assumed the borrower has an i.i.d. income stream. It is shown that, although debt is initially restricted, in the long run consumption is completely stabilised.

Lending to Sovereign Borrowers: Snapshots of the Eurocurrency Market Using a Thomian Camera

Blending empirical and theoretical analyses, the terms (spreads) granted by the Eurocurrency market to borrowers of several countries prior to the world debt crisis are examined. Specifically, a section examines the spreads over the London interbank offer rate charged to public and private entities of 6 countries. The samples are cross-sectional observations taken over a short time period, usually a year. Although the histograms of the spreads are found to exhibit a variety of shapes, a single distribution, Fisher's (1922) quartic exponential, is shown to fit all the samples rather well. A model of lending, whose implied distribution of the spreads is precisely the quartic exponential, is then offered. The model, which makes use of Catastrophe theory, also illustrates how optimizing behavior can lead to surfaces of optimal responses that exhibit elementary catastrophes.

Adverse Selection in a Model of Real Estate Lending

Adverse Selection in a Model of Real Estate Lending

Adverse Selection in a Model of Real Estate Lending

ABSTRACTWe provide a rationale for the presence of points in mortgage loan contracts. Our analysis builds on two key features. First, insurance markets are unavailable for labor income. Second, the “due‐on‐sale” clause allows banks to offer loan contracts which partially insure against fluctuations in labor income. If explicit prepayment penalties are prohibited by law, points serve effectively as prepayment penalties. We also examine environments where such penalties are not prohibited and show that points will be used if interest rates cannot depend on the size of the loan.

A Constant Recontracting Model of Sovereign Debt

We present a dynamic model of international lending in which borrowers cannot commit to future repayments and in which debtors can sometimes successfully negotiate partial defaults or "rescheduling agreements." All parties in a debt rescheduling negotiation realize that today's rescheduling agreement may itself have to be renegotiated in the future. Our bargaining-theoretic approach allows us to handle the effects of uncertainty on sovereign debt contracts in a much more satisfactory way than in earlier analyses. The framework is readily extended to analyze the conflicting interest of different lenders and of banks and creditor country taxpayers.

Why are mortgage rates so uniform?

Any reasonable model of mortgage lending concludes that interest rates depend on loan and borrower characteristics. In this paper, the rate is a function of the loan-to-value ratio, the parameters of the densities of future price of housing and income, deposit rate, and cost of foreclosure.

A Simple Simulation Model of International Bank Lending

The paper develops a simple simulation model of international bank lending to test the extent to which targeting of fixed shares in the stock of total bank claims on a borrower can make lending flows unstable. The model is based on three distinct types of lending strategies: potentially volatile lending by one group of banks with limited long-term commitment to international lending; the targeting of a given share of the total lending market; and lending based on an assessment of the borrower's creditworthiness.The results of the model's simulations suggest that lending flows can become quite unstable if more than one-half of international bank lending is predicated on the maintenance of market share. The model also indicates an ambiguous role for market information in preserving stability. To the extent that improved public information about the lending activities of banks causes more banks to target market share, such information can result in market instability. However, under a rational expectation version of the model, if the increased information about bank lending behavior is used by some banks to improve their forecasts of the reactions of other banks it can serve to stabilize the system.

COLLATERAL IN BANKING POLICY AND ADVERSE SELECTION

This paper presents a theoretical model of lending which emphasizes the role of asymmetric information and total debt service obligations between creditors and debtors. The analytical approach is based upon that of Stiglitz and Weiss (1981); however, emphasis here is placed upon collateral policy aspects of credit contracts as compared to the interest rate policy aspects. It is demonstrated that under certain market constellations, even assuming a completely flexible collateral banking policy, the credit market may be characterized by a disequilibrium situation.

Incentive-Compatible Debt Contracts: The One-Period Problem

In a simple model of borrowing and lending with asymmetric information we show that the optimal, incentive-compatible debt contract is the standard debt contract. The second-best level of investment never exceeds the first-best and is strictly less when there is a positive probability of costly bankruptcy. We also compare the second-best with the results of interest-rate-taking behaviour and consider the effects of risk aversion. Finally we provide conditions under which increasing the borrower's initial net wealth must reduce total investment in the venture. A great deal of effort has recently gone into the study of implicit contract models (ICM) in an attempt to explain the failure of competitive labour markets to generate efficient levels of employment. (See Hart, 1983, for a survey of this work and further references). Relatively little attention has been given to the theoretical analysis of capital market imperfections, a phenomenon we believe to be at least as important as labour market imperfections when it comes to explaining the inefficient use of resources, including unemployment. In this paper we seek to fill this gap by analysing a model of credit contracts between firms that need outside finance in order to operate efficiently on the one hand and the institutions that provide the money on the other. We were led to this problem by our current interest in the question of what is the firm's budget constraint? In economies with complete markets, of course, this question does not arise in a meaningful form. But when markets are incomplete the firm does face a budget constraint of some sort at each date and the form of this constraint may crucially affect its behaviour. There is no intrinsic virtue in a budget constraint which requires the firm to repay all debts with probability one and, in fact, most legal systems allow for some insurance, in the form of bankruptcy, against low income states. Perhaps the central message of our work is simply that the question of the firm's budget constraint should be formulated as a contract problem. And under certain conditions, the form of the optimal budget constraint is the same as the standard debt contract with bankruptcy. But there is more to the analysis than that. We are naturally interested not only in the shape of the firm's budget constraint but also in its position. In other words, is there credit-rationing?

Asymmetries of Information and LDC Borrowing with Sovereign Risk

The dramatic rise in the amount and extent of private lending to the lessdeveloped countries following I973 has received widespread attention. During the current recession, the Western press has often reported that creditors were unaware of the total amount of lending to individual LDCs, thereby incorrectly assessing the risk of default. This paper presents a theoretical model of international lending with sovereign risk which emphasises the role of asymmetric information about total debt-service obligations between creditors and debtors. The model is used to explain how sovereign risk leads to important special features observed in LDC borrowing. The characteristics of borrowing by the LDCs on international capital markets have been investigated and described in several recent studies (see, for example, Eaton and Gersovitz (I98I b); Fleming (I98I); Hope (I98I); IMF (I98I and I980); O'Brien (1 98 I) and Wellens (I 977)). Eaton and Gersovitz (1 98 I b), in particular, argue that the threat of possible repudiation of debt by a sovereign country is responsible for the salient differences between market outcomes for LDC borrowing and the nature of loan contracts observed in lending between developed nations and in domestic corporate finance. Access to long-term loans on the Eurobond market is limited to very few non-OPEC LDCs, and most LDCs which receive loans on the private credit market obtain medium-term commercial credit from the major U.S. and European banks. Therefore, LD C debt is typically of shorter maturity than most developed country corporate debt. The lowest income LDCs almost never gain access to the private loan market and rely upon long-term borrowing from official creditors and international agencies. Private creditors are also reported to analyse individual countries' credit-worthiness, that is, their ability, or proclivity, to absorb capital inflows and repay debts. Therefore, the adoption of policies intended to signal credit-worthiness by LDC governments is often observed. Credit on international markets is typically quantity-rationed, with countries having higher rates of saving and investment receiving larger loans at lower rates of interest. Because lenders are often unable to obtain legal remedies for breach of contract in a debtor's political jurisdiction, mutually advantageous contracts common in domestic corporate bond-finance are unenforceable in the international credit market. In the presence of sovereign risk, lenders must rely upon the threatened denial of future credits and the disruption of a debtor's commodity trade or access to trade-finance to discourage the repudiation of debt. In the case of corporate finance, bond convenants and bankruptcy provisions protect creditors from increases in their exposure to default risk created by subsequent borrowing

RURAL CREDIT POLICY AND BANK RURAL LENDING*

A model of bank rural lending in Australia for the period 1950/1973 is constructed to measure the effects of various rural credit policies on bank rural advances. Results indicate that rural sector bank deposits did not influence the rural sector's share of advances; Farm Development Loan Fund loans simply replaced overdraft advances; rural borrowers were not discriminated against in periods of tight credit; interest rate concessions induced a greater proportionate reduction in the rural share of advances.