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Rev Fin 1991; 4:121-148
© 1991 the Society for Financial Studies

Article

What is different about international lending?

B Chowdhry
Anderson Graduate School of Management, University of California at Los Angeles, Los Angeles, CA 90024-1481, USA

Abstract

An attempt is made to explain how enforceability is achieved in international debt contracts. Each bank announces the policy of denying credit to borrowers who default and chooses to adhere to it to maintain its reputation of being a tough bank to discipline its other borrowers. Loans are made by syndicates of banks in order to make the penalty for default severe enough so borrowers would choose not to default voluntarily. The model predicts that the interest rate charges on loans is smaller for the larger borrowers. Also, for any given borrower, the interest rate may fall after each successive default.


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