Innovation in Banking and Excessive Loan Growth

July 1, 2008

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The volume of credit extended by a bank can be an informative signal of its abilities in loan selection and management. It is shown that, under asymmetric information, banks may therefore rationally lend more than they would otherwise in order to demonstrate their quality, thus negatively affecting financial system soundness. Small shifts in technology and uncertainty associated with new technology may lead to large jumps in equilibrium outcomes. Prudential measures and supervision are therefore warranted.

Subject: Bank credit, Banking, Credit, Loans, Technology

Keywords: loan technology, low-technology bank, WP

Pages:
28
Volume:
2008
DOI:
https://doi.org/10.5089/9781451870466.001
Issue:
188
Series:
Working Paper No. 2008/188
Stock No:
WPIEA2008188
ISBN:
9781451870466
ISSN:
1018-5941

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