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International Bank Lending to LDCs: An Information Based Approach
Author(s) -
Gai Prasanna. S.
Publication year - 1997
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/(sici)1099-1158(199701)2:1<59::aid-ijfe17>3.0.co;2-h
Subject(s) - economics , sovereign debt , creditor , sovereignty , monetary economics , financial system , debt , information asymmetry , international economics , finance , politics , political science , law
Abstract This paper develops an information based theory of international bank lending that is compatible with the LDC debt story of the 1970s and 1980s and emphasises the importance of market structure as a factor contributing to financial crises. A feature of the market for sovereign loans, hitherto neglected, has been the leadership role played by a small group of major international ‘money‐centre’ banks and their subsequent influence over a much larger grouping of smaller, ‘regional’ banks. Lending behaviour amongst such creditor heterogeneity is captured using a signalling model that takes into account the incomplete information environment created by sovereign risk. Our main finding is that the ‘herd‐like’ behaviour of the late 1970s and early 1980s may have, in part, been generated by large money‐centre banks seeking to capitalise on their ability to influence the inferences and actions of their smaller rivals. © 1997 by John Wiley & Sons, Ltd.