• Wrong document? Swap it for free
  • Written by students who passed
  • Immediately available after payment
  • Read online or as PDF
Sell
Where do you study
Your language
Document preview thumbnail
Preview 8 out of 93 pages
Summary

Summary Credit & Banking ‘25-‘26 - 17/20

Document preview thumbnail
Preview 8 out of 93 pages

Summary of 93 pages for the course Credit and Banking at KU Leuven

Content preview

Summary Credit & Banking

,Table of Contents
Chapter 1: Why do banks exist? Why are banks special? ........................................... 4
What do banks do & what is special about banks?.............................................................. 4
Bank ................................................................................................................................................ 4
Functions and role of banks............................................................................................................... 4

Who borrows from banks? ................................................................................................ 6
Basics of credit rationing: fixed investment model .............................................................................. 6
Lenders’ credit analysis ..................................................................................................................... 7
Debt overhang ................................................................................................................................ 10

Investor activism: active role of banks/other financial intermediaries............................... 12
Introduction ................................................................................................................................... 12
Basics of investor activism .............................................................................................................. 13
Advising ......................................................................................................................................... 15
Empirics ......................................................................................................................................... 17

Chapter 2: Asymmetric Information – problems and solutions ................................. 20
Equilibrium credit rationing ............................................................................................ 20
Definition ....................................................................................................................................... 20
Credit rationing due to adverse selection ......................................................................................... 21

Collateral ....................................................................................................................... 23
Ex-ante theories: Screening versus Rationing ................................................................................... 23
Ex-post theories regarding collateral: solving ex-post frictions ........................................................... 25

Empirics ........................................................................................................................ 25
Berger, Frame and Ioannidou (2011) ................................................................................................. 25
Collateral and Credit (Degryse, De Jonghe, Laeven and Zhao (2025)) ................................................. 27

Chapter 3: Information sharing in banking markets ................................................. 29
Information sharing ........................................................................................................ 29
Model 1: information sharing Padillo & Pagano RFS 1997 .................................................................. 29
Extension of model 1: Padilla and Pagana (2000) .............................................................................. 33

Solving game for given degree of moral hazard (p is given) ................................................ 34
Without info sharing ........................................................................................................................ 34
With info sharing about defaults ...................................................................................................... 36
With info sharing about types, or complete information sharing ........................................................ 38

ENort choice .................................................................................................................. 39
Extensions ..................................................................................................................... 44
Strategic Defense: Bouckaert and Degryse (2006) ............................................................................. 44
Liquidity Management: Castiglionesi, Li, and Ma (2020) .................................................................... 45

Empirics ........................................................................................................................ 45


1

,Guest lecture Cedric Huylebroek: BigTech in finance .............................................. 48
BigTech Business model ................................................................................................. 48
Drivers of BigTech in Finance .......................................................................................... 49
Pros and cons of BigTech in Finance ................................................................................ 49
Case Study: MyBank ....................................................................................................... 52
Case Study: BNPL ........................................................................................................... 53
Old policy trade oNs ....................................................................................................... 54
New policy trade oNs ...................................................................................................... 54
Future financial landscape ............................................................................................. 55

Guest lecture Cedric Huylebroek: Suptech ............................................................. 56
Traditional bank supervision ........................................................................................... 56
How can supervisory scrutiny a]ect banks? ..................................................................................... 57

SupTech ......................................................................................................................... 58
Real e]ects of Suptech ................................................................................................................... 59

Chapter 4: Lender-Borrower Relationships ............................................................. 60
Bank versus Arm’s length financing (paper by Rajan) ........................................................ 60
The project ..................................................................................................................................... 60
Financiers ...................................................................................................................................... 61
Di]erent scenario’s: ........................................................................................................................ 61

Creditor concentration: number of relationships ............................................................. 65
DGG – theoretical model ................................................................................................................. 66

Empirics ........................................................................................................................ 68
Indicators of bank-firm relationship strength .................................................................................... 68
Impact of bank-firm relationships on firms ....................................................................................... 68
Relationship banking and firms’ credit constraints ............................................................................ 69

Chapter 5: Individual bank runs and systemic risk ................................................... 72
Individual bank runs ....................................................................................................... 72
Diamond -Dybvig (1983) – model and variants .................................................................................. 72
Runs .............................................................................................................................................. 77
Regulatory intervention ................................................................................................................... 78

Systemic risk ................................................................................................................. 78
Banking competition and stability ................................................................................... 78
Empirics ........................................................................................................................ 79
Introduction ................................................................................................................................... 79


2

, Evidence ........................................................................................................................................ 80
Liquidity risk ................................................................................................................................... 82

Chapter 6: Banking regulation – micro and macro-prudential ................................... 84
Definition ....................................................................................................................... 84
Why macro-prudential regulation? .................................................................................. 85
Macro-prudential toolkit ................................................................................................. 86

Summary Guest Lecture Issam Halak ..................................................................... 87
Fragmented banking industry: “level playing field” (diagram) ............................................................ 87
Sub-optimal allocation of capital (large vs small country diagram) .................................................... 87
Motivations for financial integration / de-fragmentation .................................................................... 88
SIU: 4 work strands ......................................................................................................................... 88

Summary PWC Lecture .......................................................................................... 88
Output floor ................................................................................................................... 92
Impact Basel IV on banking industry ................................................................................ 92




3

, Chapter 1: Why do banks exist? Why are banks
special?
What do banks do & what is special about banks?
Bank = institution whose current operations consist of granting loans and receiving deposits
from the public
Essential activities

• Granting loans: giving credit to households and firms
• Receiving deposits: collecting money from public
Aspect 1: Current

• So not occasional operation à is their main activity
• In contrast to other firms that might give trade credit, allowing customer to pay later. (e.g.
supplier credit, BNPL)
Aspect 2: Loans and deposits

• = fragility of banks
• On the debit side: all deposits liquidity may be taken at the same time (“bank run”)
• On the credit side: all lines of credit might be demanded at the same time
Aspect 3: Public
Taking deposits from public affects broader economy à justification for regulation

• Bank provides unique services
o Liquidity: people can access their money when needed
o Means of payment: banks enable transactions and payments
• Small depositors lack expertise to evaluate banks


Functions and role of banks
1. Liquidity and payment services
• Money exists to reduce transaction costs
o No money à need to barter (=trading goods for goods)
o Bartering is inefficient because you need to identify a willing counterparty
• Money keeps it usefulness overtime (you expect to use again)
• Money has positive value because it backed by government and thus can be used
for payment
• Function of money
o Means of payment (buying things)
o Store of value (you can save for future use)

4

, o Unit of account (common measure to put a value on goods/services)
• Providing payment services not profitable but necessary for granting loans and
having deposits + info obtained through checking account is valuable for
monitoring firms
o New threat from stablecoin, fintech, open banking…

2. Managing financial risks – transforming risk


Risk


Liquidity risk Interest rate risk Credit risk Financial market
Risk
= deposits can = loans are usually fixed-rate = borrowers
be withdrawn at <-> deposits rates change may default on
any but banks daily --> possible profit loans Propietary trading risk
margin shrinking. Although = banks themselves trade
transformed this also so are prone to market
in LT loans and quite limited because moving unexpectedly
can't converted depository beta is low so
this into cash deposit IR don't move much
Originate and hold to
with market rates Originate and distribute
= now they sell of the loans
to investors and collect
fees instead of holding till
maturity --> reducs long
term risk exposure




3. Alleviating asymmetric information problems
• Ex – ante asymmetric information
o One person has more info than the other
ð Result: adverse selection
ð Solution: banks screen borrowers or use contracts to reduce this
• Interim asymmetric information
o After getting loan borrower might change the distribution of payoffs or
project risk
• Ex - post asymmetric information
o Borrowers knows cash flow but bank does not so he can hide cash (cash-
flow diversion)
4. Banks and economic growth
• Bank oriented economies in 80s experienced high economic growth à suggesting
that strong banking sector benefits economic development
ð Relationship strong bank sector + economic growth weakened
over time. From 90s onward financial markets (stocks and bonds)
became more important
• Beck, Degryse & Kneer (2014) studied optimal size of financial sector relative to
GDP
ð Core function of banks (handing out credit) is good for growth


5

, ð Auxiliary services (asset management, trading, investment
banking) makes growth more volatile
• Crowding out effect of human capital
o Talented people are attracted to finance bcs of high salaries and prestinge
instead to sectors that drive real economic growth



Who borrows from banks?
Basics of credit rationing: fixed investment model
Can lenders recoup their investment?
Setup

• Lender/investor
• Entrepreneur/borrower with cash A
• Project cost I à A<I
• Borrower borrows I-A
Moral hazard problem

Probability of success Private benefit
Behaves PH 0
Misbehaves PL B
B is the private benefit the entrepreneur gets if misbehaves
Verifiable outcome

• Project succeeds with probability p and return R
• Project fails with probability 1-p and returns nothing
Assumptions

• Borrowers and investors are risk neutral
• Rate of return expected by investors is zero (due to risk neutrality)
• Lenders are in competitive market so profit is zero
𝑝! 𝑅" = 𝐼 − 𝐴
ð Because lenders make zero expected profit the expected repayment under success
probability pH must equal their initial loan
• Interest rate derivation
𝑹𝒍 = (𝟏 + 𝒊)(𝑰 − 𝑨)

→ 𝒑𝑯 (𝟏 + 𝒊)(𝑰 − 𝑨) = 𝑰 − 𝑨(inserting equation above)
𝟏 𝟏
→𝟏+𝒊=𝒑 →𝒊=𝒑 −𝟏
𝑯 𝑯




6

, This implies that if pH = 1 (so no risk) that i = 0 and if pH<1 then i >0 so lender charge a
default premium

• When project succeeds total return is R = Rb + Rl
• When project fails both get 0 so R= 0
• Project is only viable if there is no moral hazard
NPV if the borrower behaves 𝑝! 𝑅 − 𝐼 > 0
NPV if the borrower does not behave 𝑝' 𝑅 − 𝐼 + 𝐵 > 0
ð so no loan that gives incentives to misbehaves will be granted
• Total expected payoff (lender + borrower) if the borrower shirks

𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡 𝑜𝑓 𝑙𝑒𝑛𝑑𝑒𝑟 𝑖𝑓 𝑏𝑜𝑟𝑟𝑜𝑤𝑒𝑟 𝑠ℎ𝑖𝑟𝑘𝑠 = 𝑝' 𝑅" − (𝐼 − 𝐴)
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑝𝑟𝑜𝑓𝑖𝑡 𝑜𝑓 𝑏𝑜𝑟𝑟𝑜𝑤𝑒𝑟 𝑖𝑓 𝑠ℎ𝑒 𝑠ℎ𝑖𝑟𝑘𝑠 = 𝑝' 𝑅( + 𝐵 − 𝐴
→ 𝑝' 𝑅" − (𝐼 − 𝐴) + 𝑝' 𝑅( + 𝐵 − 𝐴 < 0
So when there are incentives to misbehave the project should not be financed



Lenders’ credit analysis
Incentive compatibility constraint
à the borrower must prefer to behave (and perform well) rather than misbehaving and taking the
private benefit B
So for this we need the following:

𝑬𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒑𝒓𝒐𝒇𝒊𝒕 𝒕𝒐 𝒃𝒐𝒓𝒓𝒐𝒘𝒆𝒓 𝒊𝒇 𝒃𝒆𝒉𝒂𝒗𝒆𝒔
> 𝒆𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒑𝒓𝒐𝒇𝒊𝒕 𝒕𝒐 𝒃𝒐𝒓𝒓𝒐𝒘𝒆𝒓 𝒊𝒇 𝒎𝒊𝒔𝒃𝒆𝒉𝒂𝒗𝒆

→ 𝒑𝑯 𝑹𝒃 > 𝒑𝑳 𝑹𝒃 + 𝑩

→ ∆𝒑𝑹𝒃 > 𝑩
𝑩
→ 𝑹𝒃 ≥ ∆𝒑

-
ð Result: the borrower needs to keep at least 𝑅( = ∆. otherwise she will misbehave.
This is the minimum reward necessary to align incentives
When linking this to borrower and lender payoff

𝑻𝒐𝒕𝒂𝒍 𝒓𝒆𝒕𝒖𝒓𝒏 𝑹 = 𝑹𝒃 + 𝑹𝒍

𝑰𝒏𝒔𝒆𝒓𝒕𝒊𝒏𝒈 𝒊𝒏𝒄𝒆𝒏𝒕𝒊𝒗𝒆 𝒄𝒐𝒎𝒑𝒂𝒕𝒊𝒃𝒊𝒍𝒊𝒕𝒚 𝒄𝒐𝒏𝒔𝒕𝒓𝒂𝒊𝒏𝒕 𝒈𝒊𝒗𝒆𝒔:
𝑩
→ 𝑹𝒍 ≤ 𝑹 −
∆𝒑


7

Table of contents

  1. 01 Chapter 1: Why do banks exist? Why are banks special? 4
  2. 02 What do banks do & what is special about banks? 4
  3. 03 Bank 4
  4. 04 Functions and role of banks 4
  5. 05 Who borrows from banks? 6
  6. 06 Basics of credit rationing: fixed investment model 6
  7. 07 Lenders’ credit analysis 7
  8. 08 Debt overhang 10
  9. 09 Investor activism: active role of banks/other financial intermediaries 12
  10. 10 Introduction 12
  11. 11 Basics of investor activism 13
  12. 12 Advising 15
  13. 13 Empirics 17
  14. 14 Chapter 2: Asymmetric Information – problems and solutions 20
  15. 15 Equilibrium credit rationing 20
  16. 16 Definition 20
  17. 17 Credit rationing due to adverse selection 21
  18. 18 Collateral 23
  19. 19 Ex-ante theories: Screening versus Rationing 23
  20. 20 Ex-post theories regarding collateral: solving ex-post frictions 25
  21. 21 Empirics 25
  22. 22 Berger, Frame and Ioannidou (2011) 25
  23. 23 Collateral and Credit (Degryse, De Jonghe, Laeven and Zhao (2025)) 27
  24. 24 Chapter 3: Information sharing in banking markets 29
  25. 25 Information sharing 29
  26. 26 Model 1: information sharing Padillo & Pagano RFS 1997 29
  27. 27 Extension of model 1: Padilla and Pagana (2000) 33
  28. 28 Solving game for given degree of moral hazard (p is given) 34
  29. 29 Without info sharing 34
  30. 30 With info sharing about defaults 36
  31. 31 With info sharing about types, or complete information sharing 38
  32. 32 ENort choice 39
  33. 33 Extensions 44
  34. 34 Strategic Defense: Bouckaert and Degryse (2006) 44
  35. 35 Liquidity Management: Castiglionesi, Li, and Ma (2020) 45
  36. 36 Empirics 45
  37. 37 Guest lecture Cedric Huylebroek: BigTech in finance 48
  38. 38 BigTech Business model 48
  39. 39 Drivers of BigTech in Finance 49
  40. 40 Pros and cons of BigTech in Finance 49
  41. 41 Case Study: MyBank 52
  42. 42 Case Study: BNPL 53
  43. 43 Old policy trade oNs 54
  44. 44 New policy trade oNs 54
  45. 45 Future financial landscape 55
  46. 46 Guest lecture Cedric Huylebroek: Suptech 56
  47. 47 Traditional bank supervision 56
  48. 48 How can supervisory scrutiny a]ect banks? 57
  49. 49 SupTech 58
  50. 50 Real e]ects of Suptech 59
  51. 51 Chapter 4: Lender-Borrower Relationships 60
  52. 52 Bank versus Arm’s length financing (paper by Rajan) 60
  53. 53 The project 60
  54. 54 Financiers 61
  55. 55 Di]erent scenario’s: 61
  56. 56 Creditor concentration: number of relationships 65
  57. 57 DGG – theoretical model 66
  58. 58 Empirics 68
  59. 59 Indicators of bank-firm relationship strength 68
  60. 60 Impact of bank-firm relationships on firms 68
  61. 61 Relationship banking and firms’ credit constraints 69
  62. 62 Chapter 5: Individual bank runs and systemic risk 72
  63. 63 Individual bank runs 72
  64. 64 Diamond -Dybvig (1983) – model and variants 72
  65. 65 Runs 77
  66. 66 Regulatory intervention 78
  67. 67 Systemic risk 78
  68. 68 Banking competition and stability 78
  69. 69 Empirics 79
  70. 70 Introduction 79
  71. 71 Evidence 80
  72. 72 Liquidity risk 82
  73. 73 Chapter 6: Banking regulation – micro and macro-prudential 84
  74. 74 Definition 84
  75. 75 Why macro-prudential regulation? 85
  76. 76 Macro-prudential toolkit 86
  77. 77 Summary Guest Lecture Issam Halak 87
  78. 78 Fragmented banking industry: “level playing field” (diagram) 87
  79. 79 Sub-optimal allocation of capital (large vs small country diagram) 87
  80. 80 Motivations for financial integration / de-fragmentation 88
  81. 81 SIU: 4 work strands 88
  82. 82 Summary PWC Lecture 88
  83. 83 Output floor 92
  84. 84 Impact Basel IV on banking industry 92
  85. 85 o Store of value (you can save for future use) 5
  86. 86 term risk exposure 6
  87. 87 ??−? 7
  88. 88 ∆? 8
  89. 89 Assumption that ?e > ? 9

Document information

Study
Uploaded on
February 17, 2026
File latest updated on
February 17, 2026
Number of pages
93
Written in
2025/2026
Type
Summary
$11.25

Wrong document? Swap it for free Within 14 days of purchase and before downloading, you can choose a different document. You can simply spend the amount again.
Written by students who passed
Immediately available after payment
Read online or as PDF

Seller avatar
Reputation scores are based on the amount of documents a seller has sold for a fee and the reviews they have received for those documents. There are three levels: Bronze, Silver and Gold. The better the reputation, the more your can rely on the quality of the sellers work.
StudentHIR1
4.5
(2)
Sold
39
Followers
6
Items
9
Last sold
8 hours ago



Why students choose Stuvia

Created by fellow students, verified by reviews

Quality you can trust: written by students who passed their tests and reviewed by others who've used these notes.

Didn't get what you expected? Choose another document

No worries! You can instantly pick a different document that better fits what you're looking for.

Pay as you like, start learning right away

No subscription, no commitments. Pay the way you're used to via credit card and download your PDF document instantly.

Student with book image

“Bought, downloaded, and aced it. It really can be that simple.”

Alisha Student

Working on your references?

Create accurate citations in APA, MLA and Harvard with our free citation generator.

Working on your references?

Frequently asked questions