Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/171947 
Authors: 
Year of Publication: 
2016
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2016-56
Publisher: 
Bank of Canada, Ottawa
Abstract: 
Production efficiency and financial stability do not necessarily go hand in hand. With heterogeneity in banks' abilities to screen borrowers, the market for loans becomes segmented and a self-competition mechanism arises. When heterogeneity increases, the intensive and extensive margins have opposite effects. Bank informational rents unambiguously decrease welfare and distort effort incentives. But the bank most efficient at screening expands its market share by competing against itself to offer effort-inducing contracts, which decreases the share of non-performing loans. A macroprudential authority acting alone reinforces this tension. Optimality is restored by targeting lending policies toward borrowers with intermediate abilities.
Subjects: 
Financial institutions
Financial stability
Financial system regulation and policies
JEL: 
G14
G21
L13
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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