| Financial Liberalization, Competition, and Bank Loan Quality |
Xiaofen Chen, |
| Truman State University |
| Copyright ©2005 The Journal of Economic Integration |
| ABSTRACT |
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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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