Private information obtained by lenders leads to borrower capture to the extent that such information cannot be communicated credibly to outsiders. We analyze how this capture affects the loan portfolio allocation of informed lenders. First, we show that banks charge higher interest rates and finance relatively less creditworthy borrowers in market segments with greater information asymmetries. Second, when faced with greater competition from outside lenders, banks reallocate credit toward more captured borrowers (flight to captivity). Third, if borrower quality and captivity are sufficiently correlated, an increase in the competitiveness of uninformed lenders can worsen the informed lender's overall loan portfolio. The model explains observed consequences of financial liberalizations.

We revisit the link between bailouts and bank risk taking. Bailout expectations create moral hazard – increase bank risk taking. However, when an individual bank’s success depends on both its effort and the overall stability of the banking system, bailouts that shield banks from contagion may increase their incentives to invest prudently and so reduce bank risk taking. This systemic insurance effect is more important when bailout rents are low while contagion risk is high. The optimal policy is then to make bailouts not difficult, but “effective” : associated with lower rents. We further show that, besides better bank resolution, a powerful means to reduce bailout rents is higher ex ante bank capital, since it implies a larger bank equity cushion that can be expropriated in a resolution. This highlights an important complementarity between bank capital regulation and bailouts as tools to enhance financial stability.

We identify different sources of risk as important determinants of banks' corporate structures when expanding into new markets. Subsidiary‐based corporate structures benefit from greater protection against economic risk because of affiliate‐level limited liability, but are more exposed to the risk of capital expropriation than are branches. Thus, branch‐based structures are preferred to subsidiary‐based structures when expropriation risk is high relative to economic risk, and vice versa. Greater cross‐country risk correlation and more accurate pricing of risk by investors reduce the differences between the two structures. Furthermore, a bank's corporate structure affects its risk taking and affiliate size.

We examine how the informational structure of loan markets interacts with banks' strategic behavior in determining lending standards, lending volume, and the aggregate allocation of credit. We show that, as banks obtain private information about borrowers and information asymmetries across banks decrease, banks may loosen their lending standards, leading to an equilibrium with deteriorated bank portfolios, lower profits, and expanded aggregate credit. These lower standards are associated with greater aggregate surplus and greater risk of financial instability. We therefore provide an explanation for the sequence of financial liberalization, lending booms, and banking crises observed in many emerging markets.

Following a period of privatization and restructuring, commercial banks in Central and Eastern Europe and, more recently, in the Balkans have expanded rapidly their lending to the private sector. This paper studies whether these developments are consistent with a process of convergence and structural financial deepening by estimating an “equilibrium” level of the bank-credit-to-GDP ratio. It concluded that while there is no clear evidence that the recent increases in bank credit ratios is inconsistent with financial deepening, policy-makers will have to evaluate carefully its implications for macroeconomic developments and financial stability.

The paper estimates gross credit flows for the U.S. banking system between 1979 and 1999 and shows that sizable gross flows coexist at any phase of the cycle, even within narrowly defined loan categories, bank size categories, and regional units. To investigate the macroeconomic dimensions of gross credit flows, the paper studies the cyclical behaviour of aggregate credit flows and documents three key cyclical facts. First, excess credit reallocation is countercyclical: for any given rate of change of net credit, gross flows are larger in a recession than in a boom. Second, gross credit flows are highly volatile, with a cyclical volatility which appears more than an order of magnitude larger than GDP volatility. Third, credit contraction is more volatile than credit expansion. Furthermore, the behaviour of gross flows over the 1991 recession suggests that persistent and historically high credit contraction is a key feature of the relatively mild cyclical downturn. The results lend some support to aggregate models that emphasize the asymmetric behaviour of credit expansion and credit contractions.

We examine the factors influencing international banks’ organizational form, using an original database on the operations in Latin America and Eastern Europe of the world’s top 100 banks. We find that banks are more likely to operate as branches in countries that have higher taxes and lower regulatory restrictions on bank entry and on foreign branches. Subsidiary operations are preferred by banks seeking to penetrate host markets by establishing large retail operations. Finally, economic and political risks have opposite effects, suggesting that legal differences in parent banks’ responsibilities associated with branches and subsidiaries are important determinants of banks’ organizational form.

Banking crises are usually followed by low credit and GDP growth. Is this because crises tend to take place during economic downturns, or do banking sector problems have independent negative real effects? If banking crises exogenously hinder real activity, then sectors more dependent on external finance should perform relatively worse during banking crises. The evidence in this paper supports this view. The differential effects across sectors are stronger in developing countries, in countries with less access to foreign finance, and where banking crises were more severe. Robustness checks include controlling for recessions, currency crises, and alternative proxies for bank dependence.

The financial crisis showed, once again, that neglecting real estate booms can have disastrous consequences. In this paper, we spell out the circumstances under which a more active policy agenda on this front would be justified. Then, we offer insights on the pros and cons as well as implementation challenges of various policy tools that can be used to contain the damage to the financial system and the economy from real estate boom–bust episodes. These insights derive from econometric analysis, when possible, and case studies of country experiences. Broadly, booms financed through credit and involving leverage are more likely to warrant a policy response. In that context, macroprudential measures can be targeted more precisely to specific sources of risk, but they may prove ineffective because of circumvention. In that case, monetary policy may have to be used to lean against the wind.

We study the composition of bank loan portfolios during the transition of the real sector to a knowledge economy where firms increasingly use intangible capital. Exploiting heterogeneity in bank exposure to the compositional shift from tangible to intangible capital, we show that exposed banks curtail commercial lending and reallocate lending to other assets, such as mortgages. We estimate that the substantial growth in intangible capital since the mid-1980s explains around 30% of the secular decline in the share of commercial lending in banks’ loan portfolios. We provide suggestive evidence that this reallocation increased the riskiness of banks’ mortgage lending.