Intermediary Financing without Commitment

Finance & Accounting

Speaker:Yunzhi Hu , University of North Carolina at Chapel Hill
Date: Wednesday 25 November 2020
Time: 16:00 - 17:00
Location: Online via Zoom (link available from

Further details

Intermediaries can reduce agency frictions in the credit market through monitoring. To be a
credible monitor, an intermediary needs to retain a fraction of its loans; we study the credit
market dynamics when it cannot commit to doing so. We compare the role of certification –
monitoring to increase repayment – with the role of intermediation – channeling funds from
depositors to the borrower. With commitment to retentions, certification and intermediation
are equivalent. Without commitment, they lead to very different dynamics in loan sales and
monitoring. A certifying bank sells its loans and reduces monitoring over time. By contrast, an
intermediating bank issues short-term deposits to internalize the monitoring externalities and
retain its loans. While the borrowing capacity is higher under intermediation, an entrepreneur
may prefer to borrow from a certifying-only intermediary.