Discussion Paper Details

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Title: Safety Nets Within Banks

Author(s): Mike Felgenhauer and Hans Peter Grüner

Publication Date: May 2007

Keyword(s): hierarchies, lobbying and voting rules

Programme Area(s): Financial Economics

Abstract: We study how banks should protect their credit departments against the external influence from potential borrowers. We analyze four mechanisms that are widespread in practice: a credit board with unanimity or simple majority, a hierarchy and an advisory system. A bank faces a trade-off between the quality of information aggregation and the effectiveness of barriers against external influence. We provide a ranking of the different schemes. Some of them are equivalent even though the credit managers' decision power differs. In large credit decisions, banks should sacrifice on the quality of information aggregation in order to better protect the decision making process from outside influence.

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Bibliographic Reference

Felgenhauer, M and Grüner, H. 2007. 'Safety Nets Within Banks'. London, Centre for Economic Policy Research.