#06-06
Bank Credit Cycles
Gary B. Gorton and Ping He, May 2005
Abstract:
Private information about prospective borrowers produced by a bank can affect
rival lenders due to a "winner’s curse" effect. Strategic interaction between banks
with respect to the intensity of costly information production results in endogenous
credit cycles, periodic "credit crunches." Empirical tests are constructed
based on parameterizing public information about relative bank performance that
is at the root of banks’ beliefs about rival banks’ behavior. Consistent with the
theory, we find that the relative performance of rival banks has predictive power
for subsequent lending in the credit card market, where we can identify the main
competitors. At the macroeconomic level, we show that the relative bank performance
of commercial and industrial loans is an autonomous source of macroeconomic
fluctuations. We also find that the relative bank performance is a priced
risk factor for both banks and nonfinancial firms. The factor-coefficients for non-
financial firms are decreasing with size.
Keywords:
JEL classifications :
