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The Research Of Default Contagion In Group Lending

Posted on:2016-09-06Degree:MasterType:Thesis
Country:ChinaCandidate:G T ZhouFull Text:PDF
GTID:2309330461455807Subject:Western economics
Abstract/Summary:PDF Full Text Request
Joint liability loan came from the Group lending model of Grameen Bank in Bangladesh, and it was introduced in China in 1993 and was gradually developed around the country. Its impressive repayment rate and outstanding achievements in poverty reduction attracted a lot of economists and policy-makers. This mechanism introduced the social capital, and then, reduced the asymmetric information problems on loan. It solved the problem of adverse selection and moral hazard during the credit loan, and improved the efficiency of credit loan. While, as joint liability loan reduced the personal risk of default, it also increases the risk of default of the group.The paper started from the risk of default of group brought by the joint liability loan, and focused on the default contagion which leads to collective default, and the default contagion was divided into two parts: default contagion across the groups and default contagion among members. By analyzing the two default contagion transmission mechanism, the solution to the problem was developed. The problem of default contagion across the groups was discussed a little; we just provided the solution from the aspect of the information system. There, we put lots of hard work on the problem of default contagion among members.The paper firstly presented the operating mechanism of guaranteed loans, and pointed out the inevitable existence of default contagion. Then it specifically addressed the problems raised under the current mechanisms of guaranteed loans: First, the latter defaulters have a stronger willingness to breach than the prior defaulters; second, once the strategic default existed, then the default contagion would occur and lead to collective default. This strategic default occurred under the premise of the punishment among group members. But through the analysis of the game matrix, once the strategic default occurred, the deterrence of penalty among group members would be invalid. Meanwhile, the joint guaranteed loans would face with an incomplete information game when the default contagion occurred. How to avoid default contagions continue to occur when lateral supervision failed when the default contagion occurred in the joint liability loans would be the focus of the study.In this paper, I will define the space between the first defaulters to the last one before the strategic defaulter occurs as the default contagion buffer. And there will be two default contagion critical points: which one is added the punishment among members and the other is no punishment among members. Through extending the non-default contagion areas, we can solve the problems.Once the group default has occurred, then the lateral supervision failed, so only the longitudinal supervision from the bank remained. And in order to ensure the effectivenessof longitudinal supervision from the bank, we should reconsider to add the factor of mortgage to the solution of default contagion according to the reality of the society. The limited joint liability would be proposed to replace the unlimited joint liability in joint liability loans, and the joint liability would not exceed the upper limit, thus strategic default would not occur among those who fulfill the contract, and the default contagion will be stopped. In terms of the risk of bank losses caused by the maximum limit in the limited joint liability, we will turn the losses on bank risk into systematic risk industry itself. The work of bank will be transferred from investigating the creditworthiness of the borrower to filter borrowers to searching the industry’s risk to select the loan able industry.
Keywords/Search Tags:Group lending, strategic default, default contagion
PDF Full Text Request
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