2014
DOI: 10.2139/ssrn.2524364
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Pre-Crisis Credit Standards: Monetary Policy or the Savings Glut?

Abstract: This paper presents a theoretical model of bank credit standards. It examines how a monopoly bank sets its monitoring intensity in order to manage credit risk when it makes long duration loans to borrowers who have private knowledge of their project's stochastic profitability. The model has a recursive structure and contains heterogeneous agents who can selfselect to be depositors or borrowers at any point in time. The bank loan contract considered specifies the interest rate, the monitoring intensity and a pr… Show more

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Cited by 12 publications
(3 citation statements)
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“…The model structure is essentially identical to Penalver (2014) with two important differences: the covenant threshold is endogenous and banks make their monitoring choice conditional on the last known state of the project. The key result of the paper is that the monitoring schedule is downward sloping so that projects last known to be in good profitability states are monitored with lower probability than those with low profitability.…”
Section: Non-technical Summarymentioning
confidence: 99%
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“…The model structure is essentially identical to Penalver (2014) with two important differences: the covenant threshold is endogenous and banks make their monitoring choice conditional on the last known state of the project. The key result of the paper is that the monitoring schedule is downward sloping so that projects last known to be in good profitability states are monitored with lower probability than those with low profitability.…”
Section: Non-technical Summarymentioning
confidence: 99%
“…The case for monitoring ongoing loans is thus considerably more complex than it first appears. Penalver (2014) presented a framework that answered many of these questions by incorporating a banking relationship into the firm dynamics model of Hopenhayn (1992).…”
Section: Introductionmentioning
confidence: 99%
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