While it is clear that most of the principal organizers
overlend to major player debtors during the boom, this common effect masks at least two distinct behavioural tendencies.
(191.) Debtors hold out for the same reason lenders
overlend and municipalities overgraze: the belief that the state will not allow a municipality to fail.
But there's still a healthy caution by lenders not to
overlend. Most focus on sponsorship and track records of borrowers."
Government involvement helps encourage homebuilders to overbuild, lenders to
overlend, and borrowers to overborrow.
The result is over-confident lenders who
overlend at interest rates that do not adequately reflect all of the hazards inherent in these complicated financings.
He shows that even at a microprudential level there remain difficulties with the upcoming Basel 2 framework, but the principal concern is with endogenous risk and procyclicality, as banks may
overlend in booms, and credit crunches ensue as realised credit risk rises, driving up capital requirements under Basel 2 in recessions.
By this is implied the recent critique that the Fund has bailed out private capital markets and thereby created a moral hazard problem, in the sense that the prospect of bailouts encourages private markets to
overlend. In a similar vein, the argument was made during the 1980s that the presence of the IMF and its unwillingness to lend to countries in arrears with private banks served to discourage banks from offering debt relief--the very relief required to provide a systemic solution to the debt crisis.