Collateral vs. Project Screening; A Model for Lazy Banks

This paper explores an overlooked function of banks: by project screening, banks are able to improve the allocation of capital across projects. When acting in this capacity, strict creditor protection may result in the poor performance of banks as project screeners. To increase market efficiency, there must be restrictions on collateral requirements and the protection of debtors in bankruptcy. This goes against what many argue is the primary function of banks, which many argue is to provide cheap credit.