Lending Spillovers
نویسنده
چکیده
The model presented addresses issues that have recently been discussed under the term ‘financial contagion’. I analyze a situation where the fractions of repaid loans (i.e., the returns on lending) in two domains (e.g., industries or countries) are driven by two independent factors, one specific to the domain and the other a general factor. The fact that these different factors are unobserved generates an information extraction problem. It is shown that the rationally expected fraction of repaid loans in either domain depends on the current fraction of repaid loans in that domain as well as on the fraction of repaid loans in the other domain. In a situation where one domain experiences a recession and the other a boom, it is likely that the expected return on bank loans in the first (second) domain is higher (lower) compared to a situation where both domains are in recession (boom). However, the opposite can also occur. Hence, banks’ willingness to lend to a domain can either benefit or suffer if business conditions turn favorable in another domain. * I would like to thank participants of seminars at the University of Erfurt and the Swiss National Bank for comments.
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