Innovation in Banking and Excessive Loan Growth
IMF Working Papers, July 1, 2008
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- Innovation in Banking and Excessive Loan Growth
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Bibliographic details
- Published: July 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451870466.001
Summary findings
- The volume of credit extended by a bank can be an informative signal of its abilities in loan selection and management.
- Under asymmetric information, banks may rationally lend more than they otherwise would 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.
Key implications for financial stability and policy
- Lending incentives tied to signaling can produce excessive loan growth even when banks behave rationally.
- Technological change (and uncertainty about new technology) can create non-linear shifts in equilibrium lending outcomes, increasing systemic risk.
- Regulatory and supervisory responses are justified to mitigate the risks from signaling-driven credit expansion and technology-driven jumps in outcomes.
Subjects and keywords
- Subject: Bank credit, Banking, Credit, Loans, Technology
- Keywords: loan technology, low-technology bank, WP