Credit rationing

Credit rationing by definition is limiting the lenders of the supply of additional credit to borrowers who demand funds at a set quoted rate by the financial institution.^[1] It is an example of market failure, as the price mechanism fails to bring about equilibrium in the market. It should not be confused with cases where credit is simply "too expensive" for some borrowers, that is, situations where the interest rate is deemed too high. With credit rationing, the borrower would like to acquire the funds at the current rates, and the imperfection is the absence of supply from the financial institutions, despite willing borrowers. In other words, at the prevailing market interest rate, demand exceeds supply, but lenders are willing neither to lend enough additional funds to satisfy demand, nor to raise the interest rate they charge borrowers because they are already maximising profits, or are using a cautious approach to continuing to meet their capital reserve requirements.^[2]

^ Jaffee, Dwight M. (1989), Eatwell, John; Milgate, Murray; Newman, Peter (eds.), "Credit Rationing", Money, London: Palgrave Macmillan UK, pp. 103–108, doi:10.1007/978-1-349-19804-7_10, ISBN 978-0-333-49527-8, retrieved 2020-10-27
^ Definitions for the whole article are based on class notes by Anton Korinek, University of Maryland.

[1] Jaffee, Dwight M. (1989), Eatwell, John; Milgate, Murray; Newman, Peter (eds.), "Credit Rationing", Money, London: Palgrave Macmillan UK, pp. 103–108, doi:10.1007/978-1-349-19804-7_10, ISBN 978-0-333-49527-8, retrieved 2020-10-27

[2] Definitions for the whole article are based on class notes by Anton Korinek, University of Maryland.

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