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Liquidity and Discipline. Bank Due Diligence over the Business Cycle

Cao, Qingqing and Di Pietro, Marco and Kokas, Sotirios and Minetti, Raoul (2022) 'Liquidity and Discipline. Bank Due Diligence over the Business Cycle.' Journal of the European Economic Association. ISSN 1542-4766

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Abstract

The quality of bank lending is increasingly viewed as a force driving the buildup and unfolding of crises. In a dynamic general equilibrium model, we show that banks' access to liquidity and the values of loan portfolios govern banks' incentives and effectiveness in producing information on loans. Consistent with granular loan-level evidence from U.S. banks, the calibrated model predicts that loan due diligence deteriorates during expansions and intensifies during contractions. This countercyclicality attenuates investment and output effects of liquidity shocks but can moderately amplify loan quality shocks. Credit policies may dilute stabilizing e¤ects of due diligence.

Item Type: Article
Uncontrolled Keywords: Banks; Business cycle; Due diligence; Aggregate liquidity
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: 21 Jun 2022 11:33
Last Modified: 18 Aug 2022 12:26
URI: http://repository.essex.ac.uk/id/eprint/32726

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