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Journal of Economic Integration 2005 March;20(1) :109-122.
Financial Liberalization, Competition, and Bank Loan Quality

Xiaofen Chen 

Truman State University
Copyright ©2005 Journal of Economic Integration
The paper studies the relationship between financial liberalization, characterized by removing entry restrictions, and bank loan quality. It shows that if a banking market is liberalized, the opportunity cost of screening loan applicants is driven lower by competition. Thus, a bank facing an entry threat is more likely to invest in screening instead of relying on collateral requirements. Removing entry restrictions may improve loan quality stability and reduce correlation between bank performance and asset price fluctuations.

JEL Classification: G2, L1

Keywords: financial liberalization | banking competition | screening | loan quality
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