This paper analyzes the structure of loan commitment contracts and the interrelationships among their component parameters. Lenders offer borrowers a set of loan "packages," from which the latter may choose that "package" found to be most appealing. Borrowers may "trade off' changes in any loan parameter in exchange for other adjustments. The borrower, at this time, may "purchase" a larger credit ration for a price. Supporting empirical evidence is presented. RECENTLY, RESEARCHERS HAVE BEGUN to study the determinants of loan commitment or line of credit contracts. Such contracts play an extremely important role in bank credit allocation. According to the Federal Reserve Bulletin, over 70% of U.S. commercial and industrial loans are made under loan commitment contracts. Given the central importance of the institution, it is not surprising that it is the subject of a growing literature. Loan commitment contracts have importance both at the micro level, in terms of the bank-customer relationship, and at the marco level, in terms of the channels of operation of monetary policy.In this paper, we seek to present and test empirically an analytic model of loan commitment contracts. Our paper differs from most previous work in that we include empirical analysis of credit allocation. Moreover, most previous theoretical work on the subject has concentrated on the specific issue of pricing of the contracts, often using an approach based on option theory, and not on the quantity allocation of credit and its determinants. We are particularly interested in the determinants of the quantitative allocation of credit to bank customers, and in the composition of and trade-offs among the various parameters comprising such a loan commitment "package." Our model helps explain how contract terms are established in the market and will illuminate the institutional framework of commercial lending.A view of the credit contract as a "package of loan terms" has been implied recently in connection with the credit rationing problem.' Studies by Azzi and Cox [21, Arzac, Schwartz, and Whitcomb [11 and Koskela [81 show that the respectively. We wish to thank R. N. Vaughn, R. Waggoner, and J. Whittle for their assistance during the data collection phase of this study. We are indebted to Dwight M. Jaffee and Paul Wachtel for helpful comments on an earlier draft. Thanks are due also to the anonymous reviewers for thoughtful comments which improved the paper considerably. Financial support from the Zimmerman Foundation for Research in Banking and Finance is gratefully acknowledged. 1 Over the past two decades, the possibility of quantity restrictions in the credit market has been a leading theme in the literature. In particular, the possibility of nonprice credit rationing has been widely discussed. Such rationing is said to occur when interest rates on bank loans are set below their market clearing rates, resulting in some form of excess demand (see Freimer and Gordon [5]). Recent 425 Lending Contracts and Credit Allocation 435 9.

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This paper analyzes the structure of loan commitment contracts and the interrelationships among their component parameters. Lenders offer borrowers a set of loan “packages,” from which the latter may choose that “package” found to be most appealing. Borrowers may “trade off” changes in any loan parameter in exchange for other adjustments. The borrower, at this time, may “purchase” a larger credit ration for a price. Supporting empirical evidence is presented.

No abstract