Olivier Bruno, University of Nice Sophia-Antipolis, GREDEG-CNRS, Ceram Business School, 250 rue Albert Einstein, F 06560, Valbonne, Sophia Antipolis, France (email@example.com).
Credit Availability and Capital Crunch: On the Role of the Heterogeneity of the Banking System
Version of Record online: 13 MAR 2009
© 2009 Wiley Periodicals, Inc.
Journal of Public Economic Theory
Volume 11, Issue 2, pages 251–279, April 2009
How to Cite
BRUNO, O. (2009), Credit Availability and Capital Crunch: On the Role of the Heterogeneity of the Banking System. Journal of Public Economic Theory, 11: 251–279. doi: 10.1111/j.1467-9779.2009.01409.x
This is a revised version of a first paper written with Marc-Antoine Prunier. The author thanks Cuong Le Van who established a part of the proof of proposition 1. The author is also indebted to the two anonymous referees for their helpful comment on the first version of the paper. Usual disclaimers apply.
- Issue online: 13 MAR 2009
- Version of Record online: 13 MAR 2009
- Received December 19, 2005; Accepted November 11, 2008.
We analyze the impact of a credit crunch on aggregate investment via the heterogeneous structure of the banking system. We develop a model of endogenous credit allocation in which investors and two banks differ according to their level of capital and monitoring technology. In a context of moral hazard problem, we show that banks' cost advantage in the monitoring of small businesses must be compared to their relative amount of capital in order to explain firms' optimal choice of financing, the credit allocation in the economy and the asymmetric impact of a credit crunch on aggregate investment. A shock of the same magnitude on the two banks level of capital may have a different effect on total investment. We stress that the credit crunch is maximum when the shock hits the bank specialized in the financing of small businesses and when this bank is also the less capitalized. This result is supported by recent empirical studies (Hancock and Wilcox 1998).