The author generalizes the model of Michael F. Ferguson and Stephen R. Peters (1995) to allow for unequal recovery rates in the event of default by majority borrowers versus minority borrowers. This simple extension has two direct implications: (1) a uniform credit policy, as defined by Ferguson and Peters, entails cross-subsidization across groups; and (2) it is possible for a profit-maximizing (and therefore economically nondiscriminatory) lending policy to generate lower average default rates among minority borrowers than among majority borrowers.

Theoretical studies have noted that loan applicants rejected by one bank can apply at another bank, systematically worsening the pool of applicants faced by all banks. This study presents the first empirical evidence of this effect and explores some additional ramifications, including the role of common filters—such as commercially available credit scoring models—in mitigating this adverse selection; implications forde novobanks; implications for banks' incentives to comply with fair lending laws; and macroeconomic effects. The evidence supports the simple theory regarding loan loss rates but indicates a positive association between bank structure and income growth.Journal of Economic LiteratureClassification Numbers: G21, D80, L10.

This paper models the impact of the discount window on decisions of individual banks facing regulatory capital requirements and stochastic deposit supply. A central result is that banks may choose a larger lending capacity if the discount window is available than if it is not. Moreover, if the cost of capital is higher during recessions, banks may then avoid the window, contributing to the downturn. A discontinuous interaction emerges between risk-based capital requirements and use of the discount window, with a more stringent capital requirement inducing some banks to hold less capital.

ABSTRACT We generalize the model of Ferguson and Peters (1995) to allow for unequal recovery rates in the event of default by majority borrowers versus minority borrowers. This simple extension has two direct implications: (i) a uniform credit policy, as defined by Ferguson and Peters, entails cross‐subsidization across groups; and (ii) it is possible for a profit‐maximizing (and therefore economically nondiscriminatory) lending policy to generate lower average default rates among minority borrowers than among majority borrowers.

We generalize the model of Ferguson and Peters (1995) to allow for unequal recovery rates in the event of default by majority borrowers versus minority borrowers. This simple extension has two direct implications: (i) a uniform credit policy, as defined by Ferguson and Peters, entails cross-subsidization across groups; and (ii) it is possible for a profit-maximizing (and therefore economically nondiscriminatory) lending policy to generate lower average default rates among minority borrowers than among majority borrowers.

This paper tests empirical associations between banking market structure, banking regulation, and subsequent growth rates in local real per capita personal income. Our findings suggest that out-of-market bank mergers or acquisitions need not, ceteris paribus, impair local economic growth, and may even have beneficial effects in rural markets with the possible exception of farm-dependent areas. These findings derive from empirical models that relate both short-run and long-run growth rates to geographic restrictions on bank activity, concentration in local banking markets, in-market versus out-of-market ownership of local bank offices, and in-market versus out-of-market control of local bank deposits.

This paper explores empirical linkages between credit unions’ (CUs’) policies and their financial performance, as measured by loan delinquency and profitability, using a unique micro dataset of credit unions in three Latin American countries. The estimated translog profit function is generalized using a slack variable concept that parameterizes any systematic deviation from profit-maximizing behavior exhibited within the sample. In general, we find that performance depends in important ways on two types of CU policy variables, some associated with the incentives of borrowers to repay and others that affect the CU’s ability to screen loans.