Believe those who are seeking the truth. Doubt those who find it. Andre Gide

Wednesday, April 11, 2012

What really constrains bank lending

Thought I would share an interesting article by John Carney: What Really Constrains Bank Lending. If anyone out there has worked in the business, I'd be interested to hear your thoughts.

Also, another interesting story today: Lenders Again Dealing Credit to Risky Clients.

Annette Alejandro just emerged from bankruptcy protection and doesn’t have a job, and her car was repossessed last year. Still, after spending her days job hunting, she returns to her apartment in Brooklyn where, in disbelief, she sorts through the piles of credit card and auto loan offers that have come in the mail. 
“Even I wouldn’t make a loan to me at this point,” Ms. Alejandro said.
Here we go again...


  1. One advantage of the recent crisis for people who defaulted is that, because default was so widespread, it's less informative than it usually is.

    If we think of people as having private information about their credit riskiness, then usually defaulting is informative about one's type. However, after a crisis in which many "good" types were forced into default, there is less of a stigma associated with having defaulted.

    Once aggregate credit conditions clear up, people who defaulted during the crisis should find it easier to obtain credit than comparable defaultees just before the crisis.

    1. Unless the credit market simply collapses under adverse selection problems -- in the absence of the ability of price credit riskiness effectively, the supply side of the market is likely to get small and no one will find it easy to get credit.

    2. Or mass mailers find it cheaper to let people self-select for interest in a loan before screening them.

  2. Banks also must price in the “credit risk” of making a loan—the risk that the borrowers may default, either because the collateral for the loan becomes so undervalued that the borrower “walks away” or because cash flow fall short of what is needed to make the loan.

    Bank Lending Criteria

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