Cambridge Finance Workshop Series are usually held on Thursdays during term time. The workshops are an opportunity for those working in finance to present their latest results or papers.
Yunzhi Hu (Kenan Flagler)
Title : Intermediary Financing without Commitment
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.