Bank Borrowing Research Articles

The impact of quantitative easing on UK bank lending: Why banks do not lend to businesses?

Abstract The growing proportion of UK bank lending to the financial sector reached a peak in 2007 just before the onset of the Global Financial Crisis (GFC). This marks a trend in the dwindling amount of bank lending to private sector non-financial corporations (PNFCs), which was exacerbated with the Great Recession. Many central banks aimed to revive bank lending with quantitative easing (QE) and unconventional monetary policy. We propose an agent based computational economics (ACE) model which combines the main factors in the economic environment of QE and Basel regulatory framework to analyse why UK banks do not prioritize lending to non-financial businesses. The lower bond yields caused by QE encourage big firms to substitute away from bank borrowing to bond issuance. In addition, the risk weight regime of Basel II/III on capital induces banks to favour mortgages over business loans to small and medium enterprises (SMEs). The combination of lower bond yields and Basel II/III capital requirements on banks, which, respectively, impact demand and supply of credit in the UK, plays a role in the drop of bank loans to businesses. The ACE model aims to reinstate policy regimes that form constraints and incentives for the behaviour of market participants to provide the causal factors in observed macro-economic phenomena.

Sources to Finance Fiscal Deficit and Their Impact on Inflation: A Case Study of Pakistan

Theoretically, fiscal deficit is inflationary but the sources of financing fiscal deficit may differ in terms of their impact on inflation. Question arises that what should be the least inflation cost source of financing? This study attempts to answer this question and explore the long run relationship among the sources to finance fiscal deficit and inflation. In so doing, the estimations have been done in four stages on the basis of categorisation of the deficit financing heads. In the first stage it has been tested that fiscal deficit along with money supply are inflationary. In the second stage fiscal deficit is bifurcated into two components, domestic borrowing and external borrowing for fiscal deficit. In the third stage, domestic borrowing is further divided into two heads, bank and non-bank borrowing. While in the fourth and last stage, bank borrowing is further categorised into two parts, borrowing from scheduled banks and central bank, and non-bank borrowing which comprises borrowing from National Saving Scheme for budgetary support. The Johansen Cointegration Technique is used for the first stage of estimation, while Auto Regressive Distributed Lag Model is employed for the rest of the three stages. The study finds that there is a long run relationship among sources of financing fiscal deficit and inflation. Inflation is positively affected by domestic borrowing, bank borrowing and borrowing from central bank, while central bank borrowing is more inflationary in nature. Consequently, fiscal deficit should be financed through external sources, non-bank and scheduled bank borrowings. JEL Classification: H62, H74, E31 Keywords: Deficit, State and Local Borrowing, Inflation

Chilean pension fund managers and corporate governance: The impact on corporate debt

In this paper we analyse the relationship between the investment of Pension Fund Managers (AFPs) and the cost of corporate debt (public and private). Using a sample of 93 non-financial Chilean listed firms between 2009 and 2014, we find that AFPs increase the probability of issuing bonds. Moreover, in line with our crowding out hypothesis, we show that AFPs increase the cost of bank borrowing. In line with the monitoring view, we find that AFPs decrease bond yields. On average, our results suggest that AFPs improve corporate governance by influencing information disclosure and by reducing the intensity of lending relationships with banks.

Credit Crunches from Occasionally Binding Bank Borrowing Constraints

AbstractWe present a model in which banks and other financial intermediaries face both occasionally binding borrowing constraints, and costs of equity issuance. Near the steady state, these intermediaries can raise equity finance at no cost through retained earnings. However, even moderately large shocks cause their borrowing constraints to bind, leading to contractions in credit offered to firms, and requiring the intermediaries to raise further funds by paying the cost to issue equity. This leads to the occasional sharp increases in interest spreads and the countercyclical, positively skewed equity issuance that are characteristics of the credit crunches observed in the data.

Совершенствование процедуры реструктуризации долгов граждан – заемщиков банков: историко-правовой аспект

Совершенствование процедуры реструктуризации долгов граждан – заемщиков банков: историко-правовой аспект

О ВЫБОРЕ ЭФФЕКТИВНОГО ДЛЯ БАНКА СПОСОБА ОРГАНИЗАЦИИ ДЕНЕЖНЫХ ПОТОКОВ ЗАЕМЩИКА НА ПОГАШЕНИЕ КРЕДИТА

О ВЫБОРЕ ЭФФЕКТИВНОГО ДЛЯ БАНКА СПОСОБА ОРГАНИЗАЦИИ ДЕНЕЖНЫХ ПОТОКОВ ЗАЕМЩИКА НА ПОГАШЕНИЕ КРЕДИТА

CREDIT BEHAVIOR OF HOUSEHOLDS: STRUCTURAL AND ANALYTICAL ASPECTS

Introduction. Under modern conditions, Ukrainian households are increasingly trying to follow Western models of financial behavior, in which, due to stable laws and monetary-financial system, citizens demonstrate active credit behavior. At the same time, it should be noted that during the recent years the number of users of bank loans in Ukraine, who have overdue debts, has increased rapidly, that cause concern among domestic scientists and practitioners. Purposeof the research is to analyses the modern trends in households’ credit behavior in Ukraine and development of proposals for its rationalization under the current circumstances. Results. Under modern conditions, each household forms its own model of credit behavior, taking into account certain factors, established traditions and beliefs regarding the appropriateness of borrowing funds. However, an important feature of credit dependence of our nationals is still lack of critical analysis of their own financial capabilities due to their inability to resist the natural desire of a person to “live now” and “live well”. The study showed that over the past ten years, from 8% to 16% of the adult population of Ukraine took credits in the banks. Moreover, the Western region is the leader in bank borrowings (with the exception of credit cards), while Kyiv, the North and the East show a higher level of credit card loans. Kyiv and the East are also characterized by higher demand for pawnshops. The Centre is the only region with relatively more frequent use of services of other financial institutions. Also, the practice of providing (obtaining) of so-called non-institutional credits is common among Ukrainian households, when citizens are not only borrowers but also creditors (that is, situations when relatives, friends, acquaintances are borrowing money). Conclusions. Under the context of current financial crisis in Ukraine, the role of the state, local governments, institutions and individuals in rationalizing households’ lending behavior is significantly increasing. Therefore, in our opinion, preventive measures in this sphere should be carried out at the following levels: state, local, banking and financial-credit system, and personally-individual. At the same time, it should be emphasized that these measures will be implemented only if the state provides clear legal regulation of the credit process and establishes trust relations with the population, which will help to minimize the moral and material losses of households and institutional subjects of credit activity.

Теоретико-методологічні підходи до трансформації діючої методики оцінки кредитоспроможності потенційних позичальників комерційних банків

Теоретико-методологічні підходи до трансформації діючої методики оцінки кредитоспроможності потенційних позичальників комерційних банків

Credit Supply: Are There Negative Spillovers from Banks’ Proprietary Trading?

Following the 2008 financial crisis, policy makers considered regulations that restrict banks’ activities which were motivated by concerns that banks use central bank borrowing, government guarantees, or subsidies to fund securities trading instead of lending to the real economy. Using a global sample of 132 major banks from 2003 to 2016, we find that banks’ securities trading is indeed associated with decreased loan supply. Effects are stronger for domestic lending markets, during crisis periods, and in countries with deeper financial markets. However, corporate capital expenditures and employment growth are unaffected, suggesting that policy makers’ concerns are only partly justified.

Bank Profitability, Leverage Constraints, and Risk-Taking

Traditional theory suggests that higher bank profitability (or franchise value) dissuades bank risk-taking. We highlight an opposite effect: higher profitability loosens bank borrowing constraints. This enables profitable banks to take risk on a larger scale, inducing risk-taking. This effect is more pronounced when bank leverage constraints are looser, or when new investments can be financed with senior funding (such as repos). The model's predictions are consistent with some notable cross-sectional patterns of bank risk-taking in the run-up to the 2008 crisis.

Effects of R&D Investments and Property Right Acquisitions on Startups' Bank Borrowings and Borrowing Costs in Korea

Effects of R&D Investments and Property Right Acquisitions on Startups' Bank Borrowings and Borrowing Costs in Korea

Do Bank Bailouts Affect the Provision of Trade Credit?

We document that borrowers of banks that received capital support under TARP/CPP significantly increased their quarterly provision of trade credit (accounts receivable) during the crisis by 5.2 percent, while borrowers of other banks did not. The effect is strongest in 2008Q4, and larger for pre-crisis riskier, growth-oriented and bank-dependent firms and for firms that borrow from pre-crisis smaller, less profitable and better capitalized CPP banks. Our difference-in-differences analysis shows that the effect is caused by CPP and not by heterogeneity between firms, banks and time periods. Our study provides novel evidence that suggests a beneficial multiplier effect of bank bailouts.

Wockhardt Limited: will it rise from the ashes?

Synopsis The case provides an introduction to how currency mismatches create exposures, why and how companies hedge (or do not hedge) those exposures, alternate valuation models and the use of foreign currency convertibles in funding a global expansion program. The case highlights the ambitious growth strategy of Wockhardt, a global biopharmaceutical company. In a bid to dominate the biopharmaceutical market, Wockhardt grew aggressively by acquiring companies all over the world. This expansion was funded by a mix of secured loans (bank borrowings) and unsecured loans including foreign currency (US dollar denominated) convertible bonds (FCCBs). Due to deteriorating business and economic conditions, the company experienced a sharp decline in profitability and stock price resulting in a debt overhang. The company had to restructure its capital structure in March 2009 to escape bankruptcy. Since FCCB holders did not agree to restructure the terms of the instrument, the company had to turn to senior lenders to restructure debt. The company’s management is faced with several options to deal with financial distress. The case asks students to evaluate those options. The case can be used to teach hedging foreign currency exposures, design of capital structure in rapidly evolving industries and dangers of financing R&D intensive ventures with convertible debt denominated in foreign currencies. Research methodology The case is based on secondary data sources. Information statements filed with the Securities Exchange Board of India, the company’s website, press releases and security analyst reports formed the basis for this case. Supplementary information was gathered from the CAPITALINE database, and websites of the Bombay Stock Exchange and the National Stock Exchange of India. Sources of information are documented appropriately in the case and teaching note. No names in the case have been disguised. The authors have no personal relationship with the company. Relevant courses and levels The case is suitable for courses in corporate finance, mergers and acquisitions, international financial management, corporate restructuring and valuation at the graduate level. It can also be used in executive education programs. Theoretical bases The case provides an introduction to how currency mismatches create exposures, why and how companies hedge (or do not hedge) those exposures, alternate valuation models, the use of foreign currency convertibles in funding a global expansion program and the alternatives in corporate restructuring. Suitable references are provided in the teaching note.

Acquiring Failed Banks

I study the relative importance of lending and deposit-taking for bank value. Comparing outcomes for winning banks to runner-up bidders in failed bank auctions, I find winners experience a 1.5% abnormal return and this increase is mainly due to deposits, not loans. After acquisition, the winning bank cuts lending to the failed bank's borrowers and closes branches but it retains almost all acquired deposits. These deposits are not channeled into lending elsewhere. Rather, the acquirer is able to lower deposit rates, reflecting increased market power. Multiple results are independent of the failed bank, suggesting the findings have broader relevance.

Causal Effects of Remittances’ Volatility, Consumption, and Political Changes on Financial Development: Panel Evidence from Developing Countries

Using annual panel data of 126 developing countries over the period from 1970 to 2016, this study investigates effects of remitted funds’ volatility and consumption on financial development. Our results, after controlling for endogeneity, document a significant adverse impact of remittances’ volatility on banking and stock market development suggesting that volatile remittances do not allow migrants’ families to invest in financial products offered by financial institutions and financial markets in developing countries. We find government consumption influencing significantly positive, while households’ consumption has significantly negative impact on financial development of developing countries suggesting that increasing consumption of migrants’ households in developing countries reduces incentives to save and invest in financial products, while increasing government consumption facilitates the financial development. Our results about political elections show that during election years incumbent governments consume bank borrowings and remitted funds to show a better stock market outlook to influence their forthcoming election campaigns.

Market Response to Syndicated Loan Announcements During the Global Financial Crisis: Failed vs. Acquiring Banks

We evaluate and compare market reaction to syndicated loan announcements for two sets of high-profile banks, consisting of five banks that failed in 2008 during the financial crisis and the five banks that ultimately acquired them. Results show that loan announcements are viewed differently for the two sets of banks when partitioned on loan type, loan purpose and information asymmetry. In addition to event study analysis we analyze differences in loan attributes and borrower risk characteristics for the two groups. Additional evidence on the impact of the financial crisis is shown by comparing loan announcements for the acquiring banks during pre- versus post-crisis periods. Our findings highlight the importance of the role of the syndicate in supporting the borrowers of failed banks and the timeliness with which the government encouraged the mergers or sale.

An Empirical Study on Corporate Bond Market in Indian Economy

In any economy, primarily two financial instruments- equity and debt, play an important role for raising capital for corporate sector. Though equity market has witnessed a significant growth in the recent decades, need for a deep and liquid bond market with a sizeable corporate bond market is very much important for any country. Our research paper examines the financing pattern of 85 non-financial Indian private sector companies based on CMIE database with specific reference to corporate bond. The study reveals that 90% of the companies mainly depend on borrowings from banks and financial institutions constituting the largest portion of the total borrowings followed by other borrowings, debentures/bonds and foreign borrowings. It shows that bonds/debentures still do not constitute bulk of corporate borrowings compared to bank borrowings and this highlights the importance of strengthening the bond market so that corporate can access more funds from them. In the recent past, several positive scenarios are witnessed in the Indian economy including: favourable macro-economic environment, essential need for financing large infrastructure projects across the country, favourable regulations taken by the market regulators to deepen the market (including introduction of mandatory dissemination of all information regarding the debentures to the investors and the general public in the event of default, creation of charge, revision of rating etc.). In this context, studying the financing pattern of non-financial Indian private sector companies (sample size 85, based on CMIE database for 6 years) with specific reference to corporate bonds helps to understand the growth of corporate bonds and also assess the reforms/policies initiated by various regulatory authorities and its implications on the growth of corporate bond market in India for last 10 years.

Winners and Losers of Marketplace Lending: Evidence from Borrower Credit Dynamics

Using comprehensive credit bureau data, we document that consumers who borrow from marketplace lending (MPL) platforms have lower credit scores and higher default rates in the long run relative to observably similar applicants for bank loans. This underperformance of MPL borrowers is more pronounced when the MPL platforms provide less information to MPL investors, when MPL borrowers are benchmarked against relationship bank borrowers, and for one-time MPL borrowers than repeat MPL borrowers. Overall, our results suggest that MPL lenders face greater information asymmetries with respect to their borrowers than traditional banks.

Theoretical basis for assessing the creditworthiness of bank borrower

Theoretical basis for assessing the creditworthiness of bank borrower

Born like China, growing like China

AbstractThis paper studies the effects of China's one‐child policy on saving and foreign reserve accumulation. Fertility control increases the saving rate both by altering saving decisions at the household level, and by altering the demographic composition of the population at the aggregate level. I show that demographically induced changes in saving explain the build‐up of a large foreign surplus in China. As in Song, Storesletten, and Zilibtti (2011), the model features contractual and financial market imperfections. Government‐owned firms are less productive but have full access to the credit market. Entrepreneurial firms are more productive but face credit constraints. As labour switches from less productive to more productive firms, demand for domestic bank borrowing decreases. As saving increases while demand for loans decreases, domestic savings are invested abroad, generating a foreign surplus. The model predicts that China's foreign reserve accumulation will soon begin to slow down in response to recent relaxation of the one‐child policy.