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Micro-Prudential Regulation and Loan Monitoring

Instefjord, Norvald and Nakata, Hiroyuki (2022) 'Micro-Prudential Regulation and Loan Monitoring.' Journal of Financial Services Research. ISSN 0920-8550 (In Press)

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Abstract

We evaluate the value of loan monitoring systems for a bank controlled by a micro-prudential regulator. We investigate dynamic systems (an information channel that generates information flow about quality) and static systems (where the lender receives a single signal about loan quality). We find that dynamic systems carry a regulatory charge that dominates the benefit of the systems and are therefore unprofitable, whereas static systems have positive value. Specifically, lenders can profitably dismantle their dynamic systems and instead turn to static monitoring systems. The model reveals, therefore, a potential weakness of micro-prudential regulation.

Item Type: Article
Uncontrolled Keywords: Credit scoring; Dynamic monitoring; Loan risk; Loan sales; Optimal stopping; Static monitoring
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 11 Feb 2022 16:37
Last Modified: 16 Feb 2022 18:59
URI: http://repository.essex.ac.uk/id/eprint/31912

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