Purpose – This paper aims to examine the informational efficiency in retail credit markets to test whether behavioral biases (excessive optimism) by some participants in the banking industry might explain how credit booms are fueled by the banking sector. Design/methodology/approach – This...

2008 world financial meltdown highlighted significant shortcomings on procedures used by the banking sector to provide credit to the real economy. A long period of indulgence granting personal loans and mortgages that boosted a credit bubble all over the world has been followed by an era of...

We offer a simple model of herding and limits of arbitrage in retail credit markets that follows the behavioral approach of Shleifer (2000). We show why solely behavioral biases by participants in the industry could explain how a credit bubble might be fed by the banking sector. According to our...