Volume 43, Number 171,
October-December 2012
Credit Rationing:
A Perspective from New Keynesian Economics
Abigail Rodríguez and Francisco Venegas
THE RELATIONSHIP BETWEEN BORROWERS AND LENDERS ( ...continuation )

Work from Chiang et al. (1984) explores the credit relationship between individuals and financial intermediaries in detail, and seeks to eliminate the problem of adverse selection proposed in Stiglitz and Weiss (1981). For these authors, the financial intermediary is the creditor agent, not the figure that reconciles the interests of suppliers and demanders. The basic assumptions in this study are: there are three types of applicant agents (those who are sure to pay, those who are sure to default and those who may pay or default), and two types of lenders (not very demanding and very demanding). Applicants have more information than financial intermediaries. However, the intermediaries can distinguish among their clients. Once again, those who demand credit are the most risky; the intermediaries can impose a lower penalty for default on their final clients who enjoy greater credit and demand a greater penalty to risky clients for whom credit is being rationed.12 What is interesting is that this discrimination is done by adjusting the amount of credit granted while maintaining identical interest rates for everyone.13

Mason (1977) studies the collusion between commercial banks to share information on their clients and discriminate between them based on objective criteria. This strategy allows the banks to reduce the number of alternative contracts offered in the market because they reduce the number of groups in which they classify applicants.14 By classifying the clients by risk, it becomes evident that in the group of preferential clients credit is never rationed. Clients located in the same group receive the same treatment, and as such, can be rationed in the same proportion.

Mason (1977) is also a pioneer in analyzing other elements of the relationship with demanders. For example, he emphasizes that the bank determines the current price that debtors must pay considering the permanence of the relationship with them. In other words, the bank assumes that in the future, its ability to maintain clients and generate yields depends on the credit conditions offered in the present. In general, the bank will provide better conditions to clients with whom they have a more solid relationship.

Boyd and Prescott (1986) define the “financial intermediary coalition” as the group of agents that together evaluate investment projects and invest in them. It assumes an economy in two periods, where the agents assume the functions of both lender and borrower. In the first period, the agents possess a unit of time (that they can use to produce an investment good or to evaluate a project) and an investment project. In the second period, the agents obtain yields and consume goods. For each project, the following is determined: if it is good or bad (the owner agent of the project knows this before evaluation), the signal or rating as good or bad (known in the evaluation) and the yield (known once the project is executed). The authors demonstrate the need for investment groups when the agents have different initial contributions and the goal of reaching an optimal equilibrium solution.

Problems related to imperfect information are reduced when the bank knows its clients. Petersen and Rajan (1995) write that adverse selection and moral risk lead to credit offerings to fix elevated interest rates in a first period. The renewal of loans, once the credit quality of the clients is known, allows the demanded rates to be reduced. Berger and Udell (1995) use an empirical analysis of small businesses to study the conditions in which they are subject to the granting of credit by commercial banks. They find that the clients with long-term relationships are those that enjoy preferential credit conditions: lower interest rates and lower collateral requirements.

Berger and Udell (2002) affirm that the strength of the credit relationship depends on how much information creditors have regarding the borrowers. When the information gathering is delegated to a specific area of the bank, agency problems originate because they can alter the evaluation of credit applicants (positively or negatively), but the main result is that when credit contracts are based on the establishment of preferential relationships with clients, agency problems result in changes to the organizational structure of the banking system.

Blackwell and Santomero (1982) develop a theoretical model to represent how banks order their clients and how they select the contractual conditions for their clients. Unlike the basic hypothesis, in this case the preferential clients are those that can generate the lowest earnings, and as such, they are rationed (in fact, they are the first to be rationed). In conditions with excess credit demand, the preferential clients are unable to maintain the lines of credit offered to them. These results are reinforced in Greenbaum, Kanatas and Venezia (1989). The institutions that constantly renew credit lines to the same clients have privileged information on those clients. This means that even though these are preferential relationships, the bank tends to increase the interest rate demanded every time. This attitude is strengthened because the expectation of maintaining the client for a certain period decreases. The applicant is obligated to renew its contracts with the initial bank because the search for better credit conditions generates costs.

12 The argument explains that given the same amount of credit and interest rate, a greater penalty reduces the expected profit for the applicant.

13 AdditionallyChiang, et al. (1984) examines the availability of resources for loans among Type 1 creditors (the most demanding because they impose the most severe penalties for default) and Type 2 creditors (least demanding). These authors assume that funds for the loan come from foreign investors. When there is competitive equilibrium, the active rates of the lenders are identical, but the investors prefer to grant funds to Type 1 lenders because they assure greater income. This fact eliminates the existence of Type 2 creditors. It is also possible that both borrowers coexist in equilibrium if the active rate of the least demanding is greater than the active rate required by the most demanding.

14Mason (1977) believes that collusion better explains the behaviour of commercial banks, because it is not feasible for them to establish different prices and rates for every client as proposed by Jaffee and Modigliani (1969).

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 192, January-March is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
CP 04510, México, D.F. Tel (52 55) 56 23 01 05 and (52 55) 56 24 23 39, fax (52 55) 56 23 00 97, www.probdes.iiec.unam.mx, revprode@unam.mx. Journal Editor: Alicia Girón González. Reservation of rights to exclusive use of the title: 04-2012-070613560300-203, ISSN: pending. Person responsible for the latest update of this issue: Minerva García, Circuito Maestro Mario de la Cueva s/n, Ciudad Universitaria, Coyoacán, CP 04510, México D.F., latest update: Feb 23th, 2018.
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