the assessment money and banking theory and evidence this issue of the oxford review is concerned with money and banking the articles in the issue provide a comprehensive overview of recent developments in the literature they systematically evaluate both the theoretical and empirical literature on banks the monetary transmission mechanism the operation of financial systems and bank regulation both in a domestic and an international context does money matter has been a favourite question posed by academic economists for several decades while the question has not changed the answer has during the 1950s and 60s the conventional view was that it does matter during the 1970s and 80s the influence of monetary policy on real as opposed to inflationary developments came to be increasingly questioned the consensus in the 1990s has swung back a few decades to the view that money does matter a new twist to the story which did not feature prominently in the 1950s and 60s debate is that banks as well as money matter of course there were several authors such as gurley and shaw 1960 who pointed to the importance of banks in the monetary transmission mechanism however it is really only in the last decade that economic theorists have turned their attention to the rationale for and the special role of banks the irony of this is that the theoretical justification for banks is appearing just at the moment when many commentators point to the demise of banks in the face of such close substitutes as corporate bond markets money market funds and contingent securities

new issues in corporate finance flow of funds data are used to compare methods of finance in 5 countries over the period 1970 to 1985 many of the problems associated with previous studies are avoided by estimating net instead of gross financing proportions the degree of consolidation of accounts reciprocal arrangements between borrowers and lenders and compensating deposit requirements on borrowers no longer distort financing patterns corrections for inflation are provided by employing flow rather than stock figures and using own aggregation procedures to derive stock measures significant variations in financing emerge these are not readily explained by traditional descriptions of corporate finance in particular taxation as an alternative the paper suggests that relationships between borrowers and lenders establish forms of commitment that are conducive to the provision of long term finance the separation between investment and finance which has been the starting point of corporate finance theory is untenable in a multiperiod context in which terms of finance define future allocation of control

competitive equilibrium in the credit market under asymmetric information abstract we study a competitive credit market equilibrium in which all agents are risk neutral and lenders a priori unaware of borrowers default probabilities admissible credit contracts are characterized by the credit granting probability the loan quantity the loan interest rate and the collateral required the principal result is that in equilibrium lower risk borrowers pay higher interest rates than higher risk borrowers moreover the lower risk borrowers get more credit in equilibrium than they would with full information no credit is rationed and collateral requirements are higher for the lower risk borrowers

the incidence of secured debt evidence from the small business community critics claim that theories of secured debt fail to explain the widespread use of collateral because they incorrectly predict when a loan will be secured this paper provides the first rigorous statistical test of the transaction cost models of secured debt data from two samples of over 1 000 small business loans generally support the common set of predictions of these theories the incidence of secured debt is positively related to probability of default loan size loan maturity and marketability of assets changes in the legal and economic environment also alter firms decisions regarding the pledging of collateral

equilibrium loan pricing under the bank client relationship abstract we determine the loan interest rate policy of a lender who is better informed about a client than other potential lenders the informational advantage possessed by the informed lender derives from the durability of information acquired as a result of an extant relationship given heterogeneous potential loan rate offers to the client by competitive lenders and client search costs the incumbent lender s policy of loan interest rate offers is examined we show that the optimal loan rate will exceed the incumbent lender s cost of funds and will exceed the average offer of competing lenders the potential lenders will offer loan rates that are exceeded by their cost of funds implying immediate losses in order to attract the client and to thereby earn expected profits in the future finally we show that the expected remaining duration of a lender client relationship is decreasing in the existing length of the relationship thus clients that have been with a particular lender longer will be more likely to leave and establish a relationship with another lender

who bears the incidence of import protection evidence from sri lanka abstract a simple general equilibrium model is employed to measure the incidence of protection this model focuses on the internal relative price effects of protection through the equilibrium conditions of the nontraded goods market the incidence of protection is measured via the concepts of incidence parameter true protection rates and income transfers resulting from protection the model is applied to sri lankan data the results indicate that a high proportion of all trade interventions operate as an implicit export tax that true protection rates to both import competing and exporting sectors are far below the nominal rates of assistance being provided to them and that income loss to exporters is about 4 of gdp we conclude that the incidence of protection falls mostly on the sri lankan exporters

collateral loan quality and bank risk abstract most commercial loans are made on a secured basis yet little is known about the relationship between collateral and credit risk several theoretical studies find that when borrowers have private information about risk the lowest risk borrowers tend to pledge collateral in contrast conventional wisdom holds that when risk is observable the highest risk borrowers tend to pledge collateral an additional issue is whether secured loans as opposed to secured borrowers tend to be safer or riskier than unsecured loans empirical evidence presented here strongly suggests that collateral is most often associated with riskier borrowers riskier loans and riskier banks

information reliability and a theory of financial intermediation this paper is an analysis of when it will be beneficial for agents engaged in the production of information to form coalitions the model is cast in a financial market framework thus leading to an identification of conditions sufficient for the existence of financial intermediaries intermediation is shown to improve welfare if informational asymmetries are present and the information generated to rectify these asymmetries is potentially unreliable the usual appeal to transactions costs to explain intermediation is not needed

is relationship lending special evidence from credit file data in germany the german financial market is often characterized as a bank based system with strong bank customer relationships the corresponding notion of a housebank is closely related to the theoretical idea of relationship lending it is the objective of this paper to provide a direct comparison between housebanks and normal banks as to their credit policy therefore we analyze a new data set representing a random sample of borrowers drawn from the credit portfolios of five leading german banks over a period of five years we use credit file data rather than industry survey data and thus focus the analysis on information that is directly related to actual credit decisions in particular we use bank internal borrower rating data to evaluate borrower quality and the bank s own assessment of its housebank status to control for information intensive relationships the major results of our study support the view that housebanks are able to establish a distinct behavioral pattern consistent with the idea of long term commitment we find that housebanks do provide liquidity insurance in situations of unexpected deterioration of borrower ratings with respect to loan pricing we find no evidence for intra or intertemporal price differentiation related to housebanking

bank behavior based on internal credit ratings of borrowers abstract this study examines the relation of bank loan terms to borrower risk defined by the banks internal credit rating the analysis is not restricted to a static view it also incorporates rating transition and its implications on the relation money illusion and phenomena linked with relationship banking are discovered as important factors the results show that riskier borrowers pay higher loan rate premiums and rely more on bank finance housebanks obtain more collateral and provide more finance caused by money illusion in times of high market interest rates loan rate premiums are relatively small whereas in times of low market interest rates they are relatively high there was no evidence for an appropriate adjustment of loan terms to rating changes

moral hazard and secured lending in an infinitely repeated credit market game we analyze repeated moral hazard with discounting in a competitive credit market with risk neutrality even without learning or risk aversion long term bank borrower relationships are welfare enhancing the main result is that the borrower obtains an infinite sequence of unsecured loans at below spot market cost following the first good project realization this contract produces first best action choices prior to this stage the borrower gets secured loans with above market borrowing cost the optimal contract thus displays a selective memory feature taking only one of two forms at any given point in time depending on prior history we consider an infinitely repeated bank borrower relationship with moral hazard and universal risk neutrality and explore the ramifications of credit contract duration when the two well known benefits of long term contracting learning and improved risk sharing are absent our objectives are twofold the first is to analyze an infinitely repeated game with discounting in a credit market context we thus relate the theory of repeated games to financial intermediation theory particularly to issues of moral hazard and collateral related distortions the second objective is to understand noteworthy stylized facts of credit markets such as durability in credit relationships lower borrowing costs for established borrowers and unsecured loans for established borrowers versus secured loans for newer borrowers while these practices may be partly due to learning we show that learning is not essential to rationalize them even if information decays rapidly and banks learn nothing about borrowers through time these aspects of credit contracting arise in a repeated game context our main results are as follows first despite universal risk neutrality and the absence of learning a durable bank relationship benefits the borrower 2 the intuition is that the long term contracting permitted by a durable relationship enables the bank to efficiently tax and subsidize the borrower through time to reduce the use of costly collateral second the average welfare loss due to moral hazard per period is positive even as the time horizon goes to infinity third the optimal infinite horizon contract has the striking property that following the period

collateral type of lender and relationship banking as determinants of credit risk abstract this paper analyses the determinants of the probability of default pd of bank loans we focus the discussion on the role of a limited set of variables collateral type of lender and bank borrower relationship while controlling for the other explanatory variables the study uses information on the more than three million loans entered into by spanish credit institutions over a complete business cycle 1988 2000 collected by the bank of spain s credit register central de informacion de riesgos we find that collateralised loans have a higher pd loans granted by savings banks are riskier and finally that a close bank borrower relationship increases the willingness to take more risk

secured lending and default risk equilibrium analysis policy implications and empirical results the authors examine collateral in a competitive equilibrium in which borrowers can choose hidden actions and may additionally possess hidden knowledge apart from explaining the widespread use of collateral despite deadweight costs they show that an increase in the riskless interest rate causes equilibrium loan rates and collateral requirements to increase a decline in the deadweight costs of collateral reduces the equilibrium collateral use under moral hazard and an increase in the borrower s project size reduces equilibrium collateral use under moral hazard some of these predictions are tested and found to be supported by the data copyright 1991 by royal economic society

energy models for demand forecasting a review abstract energy is vital for sustainable development of any nation be it social economic or environment in the past decade energy consumption has increased exponentially globally energy management is crucial for the future economic prosperity and environmental security energy is linked to industrial production agricultural output health access to water population education quality of life etc energy demand management is required for proper allocation of the available resources during the last decade several new techniques are being used for energy demand management to accurately predict the future energy needs in this paper an attempt is made to review the various energy demand forecasting models traditional methods such as time series regression econometric arima as well as soft computing techniques such as fuzzy logic genetic algorithm and neural networks are being extensively used for demand side management support vector regression ant colony and particle swarm optimization are new techniques being adopted for energy demand forecasting bottom up models such as markal and leap are also being used at the national and regional level for energy demand management

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

relationship lending and sme financing in the continental european bank based system this paper analyzes the relationship between banks and smes in the continental european bank based system we find that smes with longer bank relationships have enhanced access to loans but at the same time they bear a higher cost for their debt we also find that firms maintaining two bank relationships get the cheapest debt which establishes a limit for the degree of concentration of bank relationships our results also show that the existence of trust between firm and bank improves access to financing and reduces the borrowing costs whereas it increases the likelihood that guarantees will have to be provided as a consequence it seems that a relationship based on trust is a better strategy to improve smes access to finance than the establishment of longer or more concentrated relationships

asymmetric valuations and the role of collateral in loan agreements loan contracts with provision for collateral are of two general types in one the collateral may be an existing asset of the borrowing firm which is pledged to a lender in the event of default in this case collateral does not increase the assets that the borrower would lose if there is default since all the borrower s assets are attachable therefore the expected marginal cost to the borrower of providing an additional unit of collateral includes principally transactions costs associated with the collateral l this describes the usual type of commercial loan arrangement with the collateral being either equipment real estate accounts receivable or inventories in the other type of loan contract the collateral is an additional asset that is given up by the borrower if there is default that is in addition to the usual assets that are available to its lenders the borrower assigns as collateral to a creditor an asset that would normally not be legally attachable this arrangement is more common in small business loans that are secured by a personal asset e g a house of the entrepreneur likewise debt issued by a legally separate subsidiary may be secured by an asset of the parent firrn in these cases the expected marginal cost to the borrower the owner manager of the small firm or the parent corporation in the latter example of providing an additional unit of collateral

collateral and competitive equilibria with moral hazard and private information the authors examine equilibrium credit contracts and allocations under different competitivity specifications and explain the economic roles of collateral under these specifications both moral hazard and adverse selection are considered the principal message is that how a competitive equilibrium is conceptualized significantly affects the characterization of equilibrium credit contracts specifically some well known results in the rationing literature are shown to rest delicately on the adopted equilibrium concept two somewhat surprising results emerge first high quality borrowers with unlimited collateral may be priced out of the market despite the bank having idle deposits second high quality borrowers may put up more collateral this paper explores the allocational consequences of alternative credit market competitivity specifications and explains the different economic roles of collateral under these specifications we model banks that lend to borrowers financing projects with payoffs depending on a priori unknown borrower attributes and ex post unobservable borrower actions borrowers are assumed to have unconstrained access to collateral our analysis is based on two concepts of competitive equilibrium under both banks compete in the sense that they earn zero expected profits however under the first concept of equilibrium ti as in jaffee and russell 11 all rents accrue to borrowers whereas under the second concept t2 all rents accrue to depositors as in stiglitz and weiss 17 our research makes two main points first we demonstrate that the manner in which a competitive equilibrium is conceptualized importantly influences the characterization of equilibrium credit allocations specifically one of the findings is that the rationing equilibria of stiglitz and weiss 17 and others should be viewed as rather delicate things in that they are very sensitive to the competitivity specification used for instance

optimal borrowing and bank lending policies an interactive approach abstract in recent years the literature on bank lending has greatly expanded to cover such issues as the role of different lending systems alternative funding environments and interest rate polities in this paper we consider these issues from an interactive borrower bank perspective the borrower makes his borrowing decisions as a function of interest rates given his credit requirements which are assumed to vary over time and the available lending systems the bank determines its funding lending and investment polities which are dynamic determined over time and assuming optimal behavior on behalf of its borrowers determines interest rates on loans credit balances and other deposits the analysis of the bank s model provides interesting insights into lending and funding policies and shows that fixed term lending arrangements may generate additional costs to the financial system while the overdraft system does not and therefore is more efficient in this environment

an examination of the factors associated with bank switching in the u k small firm sector previous research has consistently shown that a large number of firms are sufficiently dissatisfied with their bank relationship to have considered switching to an alternative bank in practice however the number of firms which actually switch banks is relatively low this paper examines empirical evidence from a postal survey of small firms in order to investigate this paradox binomial and multinomial logistic regression is used to identify the characteristics which discriminate between a group of firms considering switching banks and two other groups namely those which had switched banks in the previous three years and those which had not switched banks and were not considering doing so the paper tests the hypothesis that some small firms may be informationally captured in that they are tied into their current bank relationship due to difficulties in conveying accurate information about their performance the results provide some evidence in support of the hypothesis in that rapidly changing information particularly changing technology was a characteristic associated with firms which were considering switching but had not switched however there was no significant evidence to support the hypothesis that superior performing firms are more likely to be informationally captured growth and perceived business success were both associated with firms which switched banks there was strong evidence that the main drivers of the decision to switch or consider switching banks were difficulties obtaining finance and dissatisfaction with the service provided the results also showed that firms which were considering switching banks tended to use more alternative non banking sources of finance it is concluded that some firms will resolve difficulties obtaining finance by switching banks whereas others will use alternative sources of finance depending on the balance between the benefits of switching such as increased finance and switching costs including information provision

information reusability competition and bank asset quality this paper explains the recent decline in bank asset quality using the notion of information reusability banks are viewed as information processors they exist because of their advantage in extracting the surplus associated with the reusability of borrower specific information it is shown that a bank s incentive to screen loan applicants and hence maintain the quality of its assets depends on the surplus this screening can produce which in turn depends on information reusability two recent changes in banks operating environment are increased competitition and greater temporal volatility in borrower credit risks the former has directly reduced banks informational surplus while the latter has impaired information reusability hence screening expenditures have been reduced and the diminution of screening has lowered the quality of bank assets it is also shown that an increase in deposit insurance premia has an effect similar to that of narrowing interest spreads and therefore will result in reduced asset screening and impaired asset quality

multiple versus single banking relationships theory and evidence a theory of the optimal number of banking relationships is developed and tested using matched bank firm data according to the theory relationship banks may be unable to continue funding profitable projects owing to internal problems and a firm may thus have to refinance from nonrelationship banks the latter however face an adverse selection problem as they do not know the quality of the project and may refuse to lend in these circumstances multiple banking can reduce the probability of an early liquidation of the project the empirical evidence supports the predictions of the model

the number and the closeness of bank relationships abstract we analyze a firm s optimal choice over the number of creditors and the extent of information disclosed to them by dealing with many creditors and disclosing essential confidential information a firm can keep its cost of credit low this however is associated with a relatively high probability that valuable information leaks to competitors leading to lower expected net returns from product market operations the importance of these two countervailing effects varies with size time industry and the form of the financial sector which yields a number of empirically testable hypotheses

the benefits of lending relationships evidence from small business data this paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm we analyze data collected in a survey of small firms by the small business administration the primary benefit of building close ties with an institutional creditor is that the availability of financing increases we find smaller effects on the price of credit attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit in sum relationships are valuable and appear to operate more through quantities rather than prices

some evidence on the empirical significance of credit rationing this paper examines the credit rationing debate using detailed contract information on over one million commercial bank loans from 1977 to 1988 while commercial loan rates are sticky consistent with rationing this stickiness varies with loan contract terms in ways that are not predicted by equilibrium credit rationing theory in addition the proportion of new loans issued under commitment does not increase significantly when credit markets are tight despite the fact that borrowers without commitments can be rationed whereas commitment borrowers are contractually insulated from rationing overall the data suggest that equilibrium rationing is not a significant macroeconomic phenomenon