Edited by Benton E. Gup
Chapter 9: Bank Directors and the Information Problem with Special Regard to Subprime Markets
Júlia Király and Katalin Mérö 9.1 Introduction One of the issues of banking involves asymmetric information. Bank directors face the problem of asymmetric information in two senses. First, the bank as a lender is less informed than its customers as borrowers. The board of directors has to take strategic decisions under conditions of imperfect information. Second, non-executive directors are always less informed than the executive management. An appropriate reporting system is required to ﬁll in this information gap. The initial problem is the classical “asymmetric information” situation ﬁrst analysed by Stiglitz and Weiss (1981). Their main conclusion was that the problem may lead to credit rationing and non-market-clearing equilibrium. The basic assumption was that bank management is risk-averse and makes decisions in a neutral environment. In this chapter a slightly diﬀerent situation will be analysed. We highlight a special market with one dominant local player and several subsidiaries of foreign banks, who are eager to seize the market even at higher risk. At the same time, the clientele comprises retail customers who earlier had been strictly liquidity-constrained, while the newly available bank loans make it possible for them to smooth their consumption path and invest in real estate. The situation is a special one in that there is a less risk-averse lender aiming to increase its market share and a less risk-averse borrower who overappreciates the availability of credit to its high cost. Directors have to ﬁnd a reliable strategic path to become a “responsible lender...
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.