Credit allocation presentation - Lecture notes 1 PDF

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 Credit allocation: Credit allocation is how a bank allocates its financial resources and other sources of credit to different processes, borrowers and projects.  Examples of credit allocation, and how can this attempt to create social benefits create costs to the private institution: In the USA, the qualified thrift lender test (QTL) requires savings and loans organisations to hold 65 per cent of their assets in residential mortgage-related assets to retain the thrift charter. Some US states have also enacted usury laws that place maximum restrictions on the interest rates that can be charged on mortgages and/or consumer loans. These types of restrictions often create additional operating costs for the FI and almost certainly reduce the amount of profit that could be realised without such regulation. There is no such regulation in Australia.  Government intervention in credit allocation: Which is a collective decision making model. The structure of decision making in banks is a crucial factor in determining the effect of government loan programs on the amount of lending. This has important policy implications for governments that wish to increase lending to certain sectors. Governments can achieve better results from their programs when facing banks that have neither centralized nor decentralized decision making systems. In fact, the closer the decision making process is to the simple majority rule, the greater the effect of the government program. Furthermore, the government can achieve superior results when lending institutions are versatile in their decision making process, choosing the optimal decision rule in accordance with the level of government intervention. The government always succeeds in increasing lending and banks always find it worthwhile to participate in the government program. There may however be cases where banks will not be willing to extend loans through a government program, or alternatively extend far fewer loans than the government intended. This can be explained by adverse selection that affects the a priori probabilities. A larger number of bad loans will enter the market, knowing that there is an increase in the probability of loan approval. This will change the distribution of population of borrowers faced by the bank and accordingly will affect the prior probabilities of facing good and bad loans....