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Intermediary Financing without Commitment

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  • UserYunzhi Hu (Kenan Flagler) World_link
  • ClockThursday 12 November 2020, 13:00-14:00
  • HouseOnline.

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Intermediaries can reduce agency frictions in the credit market through monitoring. To be a credible monitor, an intermediary needs to retain a fraction of its loans; we study the credit market dynamics when it cannot commit to doing so. We compare the role of certification – monitoring to increase repayment – with the role of intermediation – channeling funds from depositors to the borrower. With commitment to retentions, certification and intermediation are equivalent. Without commitment, they lead to very different dynamics in loan sales and monitoring. A certifying bank sells its loans and reduces monitoring over time. By contrast, an intermediating bank issues short-term deposits to internalize the monitoring externalities and retain its loans. While the borrowing capacity is higher under intermediation, an entrepreneur may prefer to borrow from a certifying-only intermediary.

This talk is part of the Cambridge Finance Workshop Series series.

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