Editing Budget constraint (section)

=== Bank ===
Bank [[supervision]] refers to the supervision on the [[capital adequacy ratio]] of banks. When the bank's capital is difficult to finance due to the default of a large number of loans, it can prevent the bank from going bankrupt with the aid of the government, then it will occurs the soft budget constraint of the bank.<ref>{{cite journal |last1=Du |first1=Julan |last2=Li |first2=David D. |title=The soft budget constraint of banks |journal=Journal of Comparative Economics |date=March 2007 |volume=35 |issue=1 |pages=108–135 |doi=10.1016/j.jce.2006.11.001 }}</ref>

Dewatripont and Maskin(1995) point out the presence of [[sunk costs]] in existing loans may lead to soft budget constraints when banks need additional financial assistance. The [[Internalization (sociology)|internalization]] of external options can expand the model by allowing banks to allocate funds between new loans and refinancing old loans. Through investment screening and monitoring technology, banks can improve the relative profitability of new loans, thus breaking the equilibrium of soft budget constraints.<ref>{{cite journal |last1=Berglöf |first1=Erik |last2=Roland |first2=Gérard |title=Soft budget constraints and credit crunches in financial transition |journal=European Economic Review |date=April 1997 |volume=41 |issue=3–5 |pages=807–817 |doi=10.1016/S0014-2921(97)00055-X }}</ref>