| Abstract: | The developing country debt crisis brought attention to the type of lending behavior that predominated while the commercial bank market developed. This article presents the major characterizations of bank behavior, particularly regarding predictions that can be tested empirically. Critically comparing existing empirical studies with these predictions shows that the magnitude of default risk and deposit insurance were incorporated into the lending behavior. However, these alone do not explain the evolution of the market. One can understand this evolution in terms of information imperfections in the market, but this evaluation contradicts a major role for agency problems in the banking firm. |
