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Information Reusability, Competition and Bank Asset Quality

Author

Listed:
  • Yuk-Shee Chan

    (Northwestern University)

  • Stuart I. Greenbaum

    (Washington University in St. Louis)

  • Anjan V. Thakor

    (Washington University in St. Louis)

Abstract
The 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 competition 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.

Suggested Citation

  • Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 2004. "Information Reusability, Competition and Bank Asset Quality," Finance 0411049, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0411049
    Note: Type of Document - pdf; pages: 11
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0411/0411049.pdf
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    References listed on IDEAS

    as
    1. Chan, Yuk-Shee, 1983. "On the Positive Role of Financial Intermediation in Allocation of Venture Capital in a Market with Imperfect Information," Journal of Finance, American Finance Association, vol. 38(5), pages 1543-1568, December.
    2. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
    3. Franklin Allen, "undated". "Contracts to Sell Information (Revised: 6-87)," Rodney L. White Center for Financial Research Working Papers 12-85, Wharton School Rodney L. White Center for Financial Research.
    4. Yuk-Shee Chan & Stuart I. Greenbaum & Anjan V. Thakor, 1985. "The deterioration of bank asset quality," Proceedings 71, Federal Reserve Bank of Chicago.
    5. Millon, Marcia H & Thakor, Anjan V, 1985. "Moral Hazard and Information Sharing: A Model of Financial Information Gathering Agencies," Journal of Finance, American Finance Association, vol. 40(5), pages 1403-1422, December.
    6. Chan, Yuk-Shee & Mak, King-Tim, 1985. "Depositors' Welfare, Deposit Insurance, and Deregulation," Journal of Finance, American Finance Association, vol. 40(3), pages 959-974, July.
    7. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    8. Campbell, Tim S & Kracaw, William A, 1980. "Information Production, Market Signalling, and the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 35(4), pages 863-882, September.
    9. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    10. Gurel, Eitan & Pyle, David, 1984. "Bank Income Taxes and Interest Rate Risk Management: A Note," Journal of Finance, American Finance Association, vol. 39(4), pages 1199-1206, September.
    Full references (including those not matched with items on IDEAS)

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    JEL classification:

    • G - Financial Economics

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