Credit Competition Research Articles

Public Disclosure and Consumer Financial Protection

AbstractThe U.S. Consumer Financial Protection Bureau has released a database of consumer complaints about banks’ financial products to the public since 2013. We find a greater reduction in mortgage applications to banks that receive more mortgage complaints in local markets after the disclosures. The effect is stronger in areas with more sophisticated consumers and higher credit competition, and for banks receiving more severe complaints. The number of monthly mortgage complaints per bank exhibits faster mean reversion after the publication of the database. These findings suggest that the public disclosure of mortgage complaints enhances product market discipline and consumer financial protection.

Credit Competition and Attenuation of Aggregate Volatility

Credit Competition and Attenuation of Aggregate Volatility

Credit Contagion and Risk Sharing among State Governments

We investigate how the negative credit events of a state can affect the credit risk of other states as well as the channels of state credit-risk spillover in the U.S. We find that one state’s credit rating downgrades and credit default swap jumps have a contagion effect on the credit risk of other states. In contrast, a negative credit outlook can introduce credit competition to non-event states. Additionally, risk sharing via capital markets and federal government are two crucial channels on the spillover effects. Industry similarity, political connections, and geographical proximity could affect the size of the interstate spillovers. Key words: State credit events, risk sharing, capital market, credit market, federal government

Good Co(o)p or Bad Co(o)p? Redistribution Concerns and Competition in Credit Markets with Imperfect Information

Abstract Non-profit organizations (NPOs), such as financial cooperatives, have a longstanding tradition in advanced market economies. We develop a model of ‘mixed credit markets’ where pure for-profit institutions (e.g. commercial banks) can coexist with financial NPOs which feature a concern for inter-member surplus redistribution (e.g. credit cooperatives) and enjoy privileged borrower-specific information vis-à-vis their for-profit peers, while facing higher funding costs. We formally investigate market competition between the two alternative financial organizations both offering contracts whose terms entail cross subsidization. We argue that heterogeneity in organizational models can explain stable coexistence under competitive conditions, and also help us interpret the variety of market outcomes — in terms of e.g. overall coverage and market shares — as documented in modern financial systems. Importantly, the viability of redistribution-oriented NPOs is shown not to rest on under-investment issues or concerns about market power, for they can successfully operate in markets where credit rationing never arises.

Are female-led firms disadvantaged in accessing bank credit? Evidence from transition economies

PurposeThe purpose of this paper is to provide empirical evidence on the presence of gender-based discrimination in formal credit markets during the global financial crisis. Specifically, the study tests for gender differences in the probability of being credit-rationed, in the likelihood of being a discouraged borrower and in the price conditions of bank financing.Design/methodology/approachThis paper uses the fifth wave of the Business Environment and Enterprise Performance Survey (BEEPS), which provides detailed micro data on firms from 26 transition economies in Europe and Central Asia. The empirical analysis employs linear and non-linear sample selection regression models and extended Blinder-Oaxaca decomposition techniques to assess gender differences in access to credit.FindingsControlling for a large set of observable firm characteristics and for endogenous selectivity, we find that female-led firms are more likely to face financing constraints and to be discouraged from applying for credit than their male counterparts. Conditional on having obtained a loan, female-led firms also face significantly higher interest rates. Furthermore, the observed gender gaps are mainly due to unexplained factors, supporting the hypothesis that banks discriminate against women-led firms in their credit-granting decision.Originality/valueThis study provides new insights on gender discrimination in formal credit markets, highlighting that gender differentials in access to credit significantly vary across countries and strongly depend upon the definition of the firm's gender structure. From a policy perspective, the evidence obtained stresses the need for policies aimed at promoting the role of women in the economic environment in order to reduce discrimination and raise competition in credit markets. Moreover, public interventions should support lending to creditworthy female enterprises in order to improve their perceptions about banks' willingness to grant credit and reduce their propensity to be discouraged from applying.

Specialization in Bank Lending: Evidence from Exporting Firms

We develop an empirical approach for identifying specialization in bank lending using granular data on borrower activities. We illustrate the approach by characterizing bank specialization by export market, combining bank, loan, and export data for all firms in Peru. We find that all banks specialize in at least one export market, that specialization affects a firm's choice of new lenders and how to finance exports, and that credit supply shocks disproportionately affect a firm's exports to markets where the lender specializes in. Thus, bank market-specific specialization makes credit difficult to substitute, with consequences for competition in credit markets and the transmission of credit shocks to the economy.

Public Disclosure and Consumer Financial Protection

The U.S. Consumer Financial Protection Bureau has accepted complaints about banks’ financial products and services since 2011 and has released the complaint database to the public since 2013. We analyze the effectiveness of this public disclosure in protecting mortgage borrowers. We find a greater reduction in mortgage applications to banks that receive more mortgage complaints in local markets after the disclosure. The effect is stronger in areas with more sophisticated consumers and higher credit competition, and for banks receiving more severe complaints. The number of monthly mortgage complaints per bank exhibits faster mean reversion after the publication of the database. Our findings suggest that the public disclosure of banks’ provision of inferior products and services enhances product market discipline and consumer financial protection.

The Effects of Information on Credit Market Competition: Evidence from Credit Cards

We show empirically that public credit information increases competition in credit markets. We access data that cover all credit card borrowers in Chile and include details about relationship borrowers have with each lender. We exploit a natural experiment whereby a non-bank lender’s portfolio was sold to a bank. Because of this transaction, the lender’s borrowers, who were previously not identifiable unless in default, become observable by banks through the credit bureau but remain unobservable to other non-bank lenders. Using a difference-in-differences strategy, we find that after the transaction the lender’s borrowers receive higher credit limits from other banks relative to other non-bank borrowers. This result is mediated by individuals whose predicted probability of bank default drops as a result of the change to banks’ information set. After the transaction, the lender shifts originations to safer borrowers with higher initial limits, a result that is consistent with cross-sectional evidence that banks tend to lend to safer borrowers. Our results imply that by increasing competition, public credit information can reduce lenders’ incentive to “learn by lending”, potentially excluding riskier populations from access to credit.

The Effect of Credit Competition on Banks’ Loan-Loss Provisions

Exploiting differential interstate-branching deregulation across contiguous counties of adjacent states, we investigate the effect of entry threat on incumbent banks’ loan-loss provisions. Incumbents exposed to entry threat have offsetting incentives; lower provisions make their loan-underwriting quality appear better, deterring entry, but make local economic conditions appear better, encouraging entry. We find that the incentive to increase apparent loan-underwriting quality dominates on average. We further find that this incentive is stronger in counties with a higher proportion of heterogeneous loans, while the other incentive dominates in counties with both low heterogeneous loans and highly volatile economic conditions.

Credit Information System in Albania

The booming lending period and many lenders (16 banks and 21 non-bank financial Institutions in Albania) brought about unprecedented competition in credit markets within Albania. Economists usually view lending and competition favorably, but in Albania resulted in a number of unforeseen non-performing loans. Findings report increased problems of borrower over-indebtedness, reduced loan repayment incentives, and growing debts for lenders1. The weakening performance of lenders is due in part to the absence of information sharing in these markets. Because growing numbers of lenders (banks and non-bank financial Institutions in Albania) increase the level of asymmetric information between lenders, credit information systems (often called credit reporting bureaus or credit bureaus) can play a crucial role towards improving credit market performance and, in turn, credit access for the poor. Increases in formal sector lending among the poor have created a need for credit information systems that provide potential lenders with borrower information. Improved screening affects from the system causes the level of non-performing loans to decline. In this paper we will present effects of a credit information system to be implemented in Albania. The weakening performance of lenders is due in part to the absence of information sharing in these markets. Because growing numbers of lenders (banks and non-bank financial Institutions in Albania) increase the level of asymmetric information between lenders, CISs can play a crucial role towards improving credit market performance and, in turn, credit access for the poor.

Retail Order-Taking Strategies Under Competing Trade Credit Policies With Varying Demands

This paper discusses optimal order-taking strategies under competing trade credit policies with varying demands. This study examines three decision-making scenarios, namely, (i) a centralized supply chain, (ii) a decentralized supply chain, and (iii) a coordinated supply chain with a buyback contract. Optimal decisions are obtained for each scenario. We find that if the average forecast value of credit sensitivity is higher than the real value, then the supply chain is at risk of having an overestimated performance; if the average forecast value of credit sensitivity is lower than the actual value, then the supply chain is at risk of having an underestimated performance. As the sensitivity of the credit competition increases, the supply chain’s performance decreases. The supply chain can be coordinated by a buyback contract.

Trade credit competition between two manufacturers in a two-echelon supply chain under credit-linked retail price and market demand

This paper considers a two-echelon supply chain model in which two manufacturers produce the same product but compete with each other in offering trade credit to their common retailer. The retailer also offers trade credit to the end customer to enhance market demand. The retailer’s demand and retail price both vary with the length of the credit period. The supply chain’s profit function is derived considering all possible cases of the trade credit period offered by the manufacturers and the retailer. The model is demonstrated numerically with a suggested algorithm. It is observed that the whole supply chain’s profit is higher for shorter cycle time and higher retail price.

Asymmetric information, foreign entry and multi-period credit competition in banking industry

In a credit market, a low-cost foreign entrant is likely less informed than a domestic bank with information endowments. We present a steady-state model in an infinite-period framework, and analyze how the informational asymmetry affects the lending equilibrium and the foreign banks’ entry modes. Firstly, we show that the domestic bank's initial informational advantage from its relatively large market share at the beginning of competition is not enough to hinder the entry of a low-cost foreign bank. In addition, the foreign bank is more likely to be the winner in the steady state of an infinite-period game than that in a static game. Secondly, the comparative static analysis show that the likelihood of foreign bank becoming the winning party increases with borrower quality, project payoff and the growth rate of potential new borrowers. Thirdly, when the foreign bank wins game in the steady state, its market share is decreasing in project payoff and the growth rate of new borrowers, while changes non-monotonically with borrower quality. Finally, we extend our model to characterize the domestic bank's sustainable advantage in being relatively familiar with new market, and provide valuable explanations for the observed entry modes of foreign banks in China.

Trade credit competition between two retailers in a supply chain under credit-linked retail price and market demand

The paper considers a supply chain system in which the sole manufacturer supplies the same product to two retailers who compete in offering trade credit period to customers. Both the market demand and retail prices vary with the trade credit periods offered by the retailers. The manufacturer also provides a trade credit period to both the retailers to settle down their accounts. The net profit function of the supply chain is derived considering possible relationships among the trade credit periods offered by the manufacturer and the retailers and the time when each retailer receives the last payment from his customer. An algorithm is developed to find the optimal solution of the proposed model. From the numerical study, it is observed that a two-level trade credit financing can increase profits not only for the manufacturer and the retailers but also for the whole supply chain.

The Effects of Credit Competition on Banks’ Loan Loss Provision Timeliness: A Natural Experiment Across Contiguous State Borders

Using interstate branching deregulation across contiguous counties of adjacent states, we investigate the effect of entry threat on incumbent banks’ loan loss provisions. Incumbents exposed to threat have offsetting incentives to report provisions; lower provisions make incumbents’ loan underwriting quality appear better, deterring entry, but local economic conditions appear better, encouraging entry. We find that the incentive to increase apparent loan underwriting quality dominates on average. We further find that this incentive is stronger in counties with a higher proportion of heterogeneous loans, and the other incentive dominates in counties with both few heterogeneous loans and highly volatile economic conditions.

Illiquidity Premia in Asset Returns: An Empirical Analysis of Hedge Funds, Mutual Funds, and US Equity Portfolios

We establish a link between illiquidity and positive autocorrelation in asset returns among a sample of hedge funds, mutual funds, and various equity portfolios. For hedge funds, this link can be confirmed by comparing the return autocorrelations of funds with shorter vs. longer redemption-notice periods. We also document significant positive return-autocorrelation in portfolios of securities that are generally considered less liquid, e.g., small-cap stocks, corporate bonds, mortgage-backed securities, and emerging-market investments. Using a sample of 2,927 hedge funds, 15,654 mutual funds, and 100 size- and book-to-market-sorted portfolios of US common stocks, we construct autocorrelation-sorted long/short portfolios and conclude that illiquidity premia are generally positive and significant, ranging from 2.74% to 9.91% per year among the various hedge funds and fixed-income mutual funds. We do not find evidence for this premium among equity and asset-allocation mutual funds, or among the 100 US equity portfolios. The time variation in our aggregated illiquidity premium shows that while 1998 was a difficult year for most funds with large illiquidity exposure, the following four years yielded significantly higher illiquidity premia that led to greater competition in credit markets, contributing to much lower illiquidity premia in the years leading up to the Financial Crisis of 2007–2008.

On the effects of banks’ equity ownership on credit markets

Recent deregulation of the banking sector in the US and in Europe allows commercial banks to hold equity in non-financial firms. We develop a model to investigate the effects of bank equity stakes in firms on credit market competition. The main result is that an equity stake confers a competitive advantage to the holding bank, which in equilibrium results in decreased competition in credit markets and higher interest rates being charged to firms. However, regulatory limits on the size of a bank’s stake may, under certain conditions, be counterproductive: they could actually strengthen the equity-owning bank’s competitive advantage. Our findings shed new light on the role of equity in lending relationships, and highlight that, in addition to the well-known prudential aspects, there is an antitrust dimension in the separation of banking and commerce.

Does Credit Competition Affect Small‐Firm Finance?

ABSTRACTWhile relaxation of geographical restrictions on bank expansion permitted banking organizations to expand across state lines, it allowed states to erect barriers to branch expansion. These differences in states' branching restrictions affect credit supply. In states more open to branching, small firms borrow at interest rates 80 to 100 basis points lower than firms operating in less open states. Firms in open states also are more likely to borrow from banks. Despite this evidence that interstate branch openness expands credit supply, we find no effect of variation in state restrictions on branching on the amount that small firms borrow.

Illiquidity Premia in Asset Returns: An Empirical Analysis of Hedge Funds, Mutual Funds, and U.S. Equity Portfolios

We establish a link between illiquidity and positive autocorrelation in asset returns among a sample of hedge funds, mutual funds, and various equity portfolios. For hedge funds, this link can be confirmed by comparing the return autocorrelations of funds with shorter vs. longer redemption-notice periods. We also document significant positive return-autocorrelation in portfolios of securities that are generally considered less liquid, e.g., small-cap stocks, corporate bonds, mortgage-backed securities, and emerging-market investments. Using a sample of 2,927 hedge funds, 15,654 mutual funds, and 100 size- and book-to-market-sorted portfolios of U.S. common stocks, we construct autocorrelation-sorted long/short portfolios and conclude that illiquidity premia are generally positive and significant, ranging from 2.74% to 9.91% per year among the various hedge funds and fixed-income mutual funds. We do not find evidence for this premium among equity and asset-allocation mutual funds, or among the 100 U.S. equity portfolios. The time variation in our aggregated illiquidity premium shows that while 1998 was a difficult year for most funds with large illiquidity exposure, the following four years yielded significantly higher illiquidity premia that led to greater competition in credit markets, contributing to much lower illiquidity premia in the years leading up to the Financial Crisis of 2007-2008.

Credit Market Competition and the Nature of Firms

Empirical studies show that competition in the credit markets has important effects on the entry and growth of firms in nonfinancial industries. This paper explores the hypothesis that the availability of credit at the time of a firm's founding has a profound effect on that firm's nature. I conjecture that in times when financial capital is difficult to obtain, firms will need to be built as relatively solid organizations. However, in an environment of easily available financial capital, firms can be constituted with an intrinsically weaker structure. To test this conjecture, I use confidential data from the U.S. Census Bureau on the entire universe of business establishments in existence over a thirty-year period; I follow the life cycles of those same establishments through a period of regulatory reform during which U.S. states were allowed to remove barriers to entry in the banking industry, a development that resulted in significantly improved credit competition. The evidence confirms my conjecture. Firms constituted in post-reform years are intrinsically frailer than those founded in a more financially constrained environment, while firms of pre-reform vintage do not seem to adapt their nature to an easier credit environment. Credit market competition does lead to more entry and growth of firms, but also to complex dynamics experienced by the population of business organizations.