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Title:Forbearance lending and soft budget constraints in a model of multiple heterogeneous bank financing PDF Logo
Authors:Schüle, Tobias
Issue Date:2006
Series/Report no.:Tübinger Diskussionsbeitrag 303
Abstract:Empirical evidence suggests that banks often engage in refinancing of intrinsically insolvent debtors instead of writing of their non-performing loans. Such forbearance lending may induce soft budget constraints for the debtors, as it diminishes their incentives to thwart default. This paper introduces a model of coordination failure to analyze how a relationship bank affects the incidence of forbearance lending and soft budget constraints by signaling its credit decision to other creditors. We find that the relationship bank's signaling ability enhances its incentives to engage in forbearance lending and infuences the conditions under which debtors face soft budget constraints.
Subjects:coordination failure
global games
asymmetric information
forbearance lending
soft budget constraints
JEL:C72
D82
G21
G33
Persistent Identifier of the first edition:urn:nbn:de:bsz:21-opus-22497
Document Type:Working Paper
Appears in Collections:Tübinger Diskussionsbeiträge, Universität Tübingen

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