The paper analyzes bank loan supply in a simple value maximizing partial equilibrium framework. The focus is on the role of bank capital, capital regulation and the pricing of bank liabilities. The model is constructed so as to resemble the situation of the Finnish local banks in the late 1980s...

The paper examines the determination of bank lending during the Finnish credit boom of 1986–1990 with the data of 483 savings and cooperative banks. A particular objective is to establish whether bank behaviour is consistent with what is called moral hazard hypothesis, according to which banks...