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Working Paper
Self-Fulfilling Credit Cycles
In U.S. data 1981?2012, unsecured firm credit moves procyclically and tends to lead GDP, while secured firm credit is acyclical; similarly, shocks to unsecured firm credit explain a far larger fraction of output fluctuations than shocks to secured credit. In this paper we develop a tractable dynamic general equilibrium model in which unsecured firm credit arises from self-enforcing borrowing constraints, preventing an efficient capital allocation among heterogeneous firms. Unsecured credit rests on the value that borrowers attach to a good credit reputation which is a forward-looking ...
Working Paper
Banks, Non Banks, and Lending Standards
We study how competition between banks and non-banks affects lending standards. Banks have private information about some borrowers and are subject to capital requirements to mitigate risk-taking incentives from deposit insurance. Non-banks are uninformed and market forces determine their capital structure. We show that lending standards monotonically increase in bank capital requirements. Intuitively, higher capital requirements raise banks’ skin in the game and screening out bad projects assures positive expected lending returns. Non-banks enter the market when capital requirements are ...
Working Paper
Macroprudential Regulation and Lending Standards
We examine how macroprudential capital requirements interact with competition between banks and non-banks to shape lending standards. Banks have private information and benefit from deposit insurance, while non-banks lack such advantages but are less regulated. We show that higher capital requirements raise banks' incentives to screen, tightening lending standards despite a decline in lender protections at the contract level. Non-bank competition does not erode but rather strengthens aggregate standards by crowding out riskier bank lending. Optimal capital regulation is lower in the presence ...