Credit Contracts Research Articles

Do Credit Conditions Move House Prices?

To what extent did an expansion and contraction of credit drive the 2000s housing boom and bust? The existing literature lacks consensus, with findings ranging from credit having no effect to credit driving most of the house price cycle. We show that the key difference behind these disparate results is the extent to which credit insensitive agents such as landlords and unconstrained savers absorb credit-driven demand, which depends on the degree of segmentation in housing markets. We develop a model with frictional rental markets that allows us to consider cases in between the extremes of no segmentation and perfect segmentation typically assumed in the literature. We argue that the relative elasticities of the price-rent ratio and homeownership with respect to an identified credit shock is a sufficient statistic to measure the degree of segmentation. We estimate this moment using three different credit supply instruments and use it to calibrate our model. Our results reveal that rental markets are highly frictional and closer to fully segmented, which implies large effects of credit on house prices. In particular, changes to credit standards can explain between 34% and 55% of the rise in price-rent ratios over the boom.

Capital Flows in the Financial System and Supply of Credit

This paper develops a model to study how capital flows in the financial system affect banks’ coordination problem in the credit supply process. The economy is susceptible to self-fulfilling credit freezes: banks abstain from lending when they fear that other banks will withhold lending, and the resultant credit contraction impedes economic growth. Capital flows across banks can alleviate the problem by enabling optimistic banks to borrow from pessimistic banks and extend more credit to the real economy. However, the equilibrium interest rate reveals public information about economic fundamentals and banks’ aggregate willingness to lend, increasing the fragility of the credit market. As a result, the economy can get stuck in an equilibrium where both interbank capital flows and the real credit supply freeze and they reinforce each other through a vicious feedback loop. Regulations addressing counterparty risks can help to maintain active capital flows in the financial system and stabilize the real credit market.

Financing Inventories with an Investment Efficiency Objective: ROI-Maximizing Newsvendor, Bank Loans and Trade Credit Contracts

The inventory and supply chain management literature barely mentions any use of capital efficiency metrics, such as Return-on-Investment (ROI), and their impact on ordering decisions and inventory investments. Our work will offer an understanding of how such metrics, like ROI, affect orders at a stand-alone single stocking stage under demand uncertainty (newsvendor-like models) or within bilateral supply chains of a supplier and retailer interacting with the use of a trade-credit-contract. The ROI-driven newsvendor without any capital constraints offers similar insights to earlier Economic-Order-Quantity work. The newsvendor orders less than the traditional quantity. The insights carry through to model extensions that account for capital constraints, bankruptcy risks and costs. The analysis of the trade-credit contract with an ROI-optimizing retailer continues to support the low-interest rate of such contracts, but interestingly shows that the retailer now orders more than under profit optimization. As a result, the overall supply chain efficiency improves, and the retailer appropriates a larger percentage of the chain profit.

Kepastian Hukum Kredit Online

This paper aims to discuss the validity of a contract in online credit and the provision of collateral for online credit as an embodiment of the 5C principle in banking. The method of study uses a normative juridical approach to the legislation and conceptual approach. Online credit contracts are legally valid because they meet the legal requirements of a contract, only the legal certainty is low because the parties do not know firsthand the good intentions of the parties. The provision of collateral in online credit is not against the law, it’s just that the precautionary principle that the bank should apply in providing credit is not fulfilled. The creditor does not have a guarantee for the debtor’s debt repayment if at any time the debtor is unable to repay the loan or break the promise.

Banking and Leverage: Toward a Model of Financial Stability

This paper presents a theoretical model of bank leveraging based on Stein (2011, 2012) and Brunnermeier and Sannikov (2014). The paper offers an analytical review of the literature on bank leveraging and focuses on the adverse effects of excessive leverage and the vulnerabilities and credit contractions that can subsequently occur. Moreover, this paper solves the optimal control problem of the model with a finite time decision horizon to present an analysis of the dynamics of net worth and optimal or sustainable leverage, including a discussion of periods of high and low interest rates. The study shows that overleveraging and optimal debt move in opposite directions. Furthermore, a literature review on bank leverage and monetary policy is presented followed by an analysis of the link between credit growth, GDP growth, and overleveraging in five countries. The findings show that periods of low credit growth are accompanied by periods of low GDP growth because constrained credit limits investments as well as consumption in many cases.

Trade credit, group affiliation, and credit contraction: Evidence from the 1997 Korean financial crisis

The literature shows that, during a credit crunch, liquid firms provide more trade credit to their client firms. However, the literature neglects the possibility that a firm may be affiliated with a business group. A group-affiliated firm may make different trade credit provision decisions based on whether its clients are affiliated with them, especially during a credit crunch. Thus, to fill the gap, this study investigates the trade credit behaviors of Korean firms affiliated with business groups during the 1997 Korean financial crisis. I find evidence that group-affiliated firms with high liquidity increase trade credit provision only to their affiliates, while they decrease financial assistance to unaffiliated client firms. Financially distressed firms receive less trade credit from unaffiliated suppliers. These findings suggest that business groups tend to exploit trade credit as an emergency liquidity source within intra-group liquidity markets during the financial crisis.

Decision making in trade credit financing: impact of loss aversion and power imbalance

AbstractWe incorporate loss aversion and power imbalance into a trade credit contract that sets both wholesale price and payment ratio at ordering time. Our models are based on a dyadic supply chain consisting of a loss‐averse supplier and a capital‐constrained retailer who can get finance via bank credit or trade credit. We derive the optimal trade credit contract under the retailer‐dominant noncooperative (RDN) and the supplier‐dominant noncooperative (SDN) games. Our results show that the impact of the supplier's loss aversion depends on whether the supplier dominates the supply chain. Specifically, under RDN scenario, a single bank credit should be adopted by the retailer, irrespective of the supplier's loss aversion. Under SDN scenario, however, a hybrid of bank credit and trade credit should be provided to the retailer when the supplier's loss aversion level exceeds a critical threshold value, and a single trade credit should be granted otherwise. Moreover, we find that the capital‐constrained retailer may benefit from the supplier's loss aversion behavior. Finally, we conduct a serial of numerical examples to develop more managerial insights.

The economics of debt collection

This paper considers the role of policies that protect consumers from aggressive debt collection tactics. In general, rational consumers will select credit contracts based not only on price but also on the lender’s practices in the case of default and might prefer a contract that offers higher interest rates but more lenient collection tactics. We consider a model in which consumers can be optimistic in that they underestimate, at the time they borrow, the chance of a negative income shock that could cause them to default. This mindset induces consumers to perceive the welfare associated with borrowing to be greater than it is and to place less weight on the lender’s collection practices, which may cause them to prefer lower interest rate contracts even if they are accompanied by high collection effort in the event of default. We report supporting evidence that is consistent with consumers being optimistic when they borrow. We develop a two-period model of consumer borrowing that incorporates debt collection: consumers borrow in the first period, and repay, settle or default in the second. We show in both partial and general equilibrium settings that a restriction on debt collection effort can be welfare improving under some conditions. The restriction operates by reducing the gap between perceived and actual consumer welfare for optimistic consumers.

Consumer Vulnerability and Behavioral Biases

A wealth of evidence shows that individuals are biased and firms can often exploit consumers' behavioral biases in their contract designs. In this paper, we study how vulnerable biased individuals are to their own behavioral biases in market equilibrium, and focus on the role of risk aversion and intertemporal elasticity of substitution (IES). We measure consumer vulnerability by the percentage loss in a consumer's equilibrium certainty equivalent from a market with non-biased consumers to that with biased ones. We examine several important behavioral biases that have been extensively studied in the literature, including the impact of biased beliefs (either over- or under-confidence) in an insurance market, the impact of present bias and naivete about present bias in a dynamic model of credit contract design, the impact of projection bias about habit formation, and the impact of expectation-based loss aversion on an investor's portfolio choice. We show that consumer vulnerability to all four commonly studied behavioral biases has a non-monotonic relationship with risk aversion or IES. This is in striking contrast to the deviations in the equilibrium allocations from the rational benchmark, which are often monotonic to the risk aversion or IES. We also consider a setting of biased agents with Epstein-Zin preferences to isolate the effect of risk aversion from that of IES. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

European Puts, Credit Protection, and Endogenous Default

In a default corridor [Formula: see text] that the stock price can never enter, a deep out-of-the-money American put option replicates a pure credit contract (Carr and Wu, 2011, A Simple Robust Link between American Puts and Credit Protection, Review of Financial Studies 24, 473–505). Assuming discrete (one-period-ahead predictable) cash flows, we show that an endogenous credit-risk model generates, along with the default event, a default corridor at the cash-outflow dates, where [Formula: see text] is given by these outflows (i.e., debt service and negative earnings minus dividends). In this endogenous setting, however, the put replicating the credit contract is not American, but European. Specifically, the crucial assumption that determines an endogenous default corridor at the cash-outflow dates is that equityholders’ deep pockets absorb these outflows; that is, no equityholders’ fresh money, no endogenous corridor.

Optimal Collateralized Contracts

We examine the role of collateral in a dynamic model of optimal credit contracts in which a borrower values both housing and nonhousing consumption. The borrower’s private information about his income is the only friction. An optimal contract is collateralized when in some state, some portion of the borrower’s net worth is forfeited to the lender. We show that optimal contracts are always collateralized. The total value of forfeited assets is decreasing in income, highlighting the role of collateral as a deterrent to manipulation. Some assets—those that generate consumable services—will necessarily be collateralized, while others may not be. Endogenous default arises when the borrower’s initial wealth is low, as with subprime borrowers, and/or his future earnings are highly variable. (JEL D82, D86, G21, G51)

Practical Applications of CLOs, Private Equity, Pensions, and Systemic Risk

<h3>Practical Applications Summary</h3> In <b><i>CLOs, Private Equity, Pensions, and Systemic Risk</i></b>, from the Spring 2020 issue of <i>The Journal of Structured Finance</i>, <b>Rod Dubitsky</b>, founder of the <b>People’s Economist</b>, examines rating agency models for analyzing collateralized loan obligations (CLOs) and concludes that they are deeply flawed in that they rely on historical data that does not describe the current situation and on assumptions about correlation (diversification) that do not hold true in practice. Dubitsky presents evidence that default likelihoods are higher and expected recoveries are lower than the rating agencies assume in their models. He also highlights problematic practices in the CLO market, including weakened bond covenants and other terms, conflicts of interest in the management of CLO underlying portfolios, and a rising concentration of underlying leveraged loans in the lowest rating categories. Additionally, Dubitsky examines the relationships among 1) CLOs, 2) private equity–sponsored companies that borrow via leveraged loans that are then packaged into CLOs, and 3) pension plans that invest in private equity (PE) funds and CLOs. He argues that a contraction of available CLO-funded credit to leveraged-loan borrowers could cause many to fail, resulting in both increased unemployment and losses to PE funds and their pension plan investors. He concludes that the potential contraction of CLO funding for leveraged loans creates significant systemic risk. <b>TOPICS:</b>CLOs, CDOs, and other structured credit; financial crises and financial market history

Considerations on unfair terms in bank credit contracts

Over the last few years, we have seen an increasingly number of case law that was presented before national courts as well as the European Court of Justice concerning unfair terms in bank credit contracts. This subject was raised especially during the crisis in which the swiss francs had appreciated, leading numerous customers that had previously taken bank loans in this currency unable to pay back loans that had risen in almost half their value. Development in international and national legislation, such as Law no. 193/2000 concerning unfair terms in contracts concluded between professionals and consumers, that transposed into our national legislation the Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts, both restricted or banned the use of such practices and were in force long before the crisis was generated. This however did not stop credit institutions from inserting these types of clauses in the contracts that they had concluded. The issue that we aim to treat in this article is whether the recent practices of credit and bank institutions has changed over the course of the last few years, given the development of jurisprudence that most often than not condemns abusive or unfair terms in credit agreements with consumers.

Banking Crises Without Panics*

Abstract We examine historical banking crises through the lens of bank equity declines, which cover a broad sample of episodes of banking distress with and without banking panics. To do this, we construct a new data set on bank equity returns and narrative information on banking panics for 46 countries over the period of 1870 to 2016. We find that even in the absence of panics, large bank equity declines are associated with substantial credit contractions and output gaps. Although panics are an important amplification mechanism, our results indicate that panics are not necessary for banking crises to have severe economic consequences. Furthermore, panics tend to be preceded by large bank equity declines, suggesting that panics are the result, rather than the cause, of earlier bank losses. We use bank equity returns to uncover a number of forgotten historical banking crises and create a banking crisis chronology that distinguishes between bank equity losses and panics.

Remittances and rural credit markets: Evidence from Senegal

AbstractThis study investigates the relationship between remittances and credit markets in Senegal, focusing on rural areas where financial constraints are more challenging. Using a household fixed effects model, the findings show that remittances and credit markets are complements; namely, the receipt of remittances is positively associated with the likelihood of having a loan in a household. This means that migrants can increase the reliability of their family members and close relatives back home through their remittances, insuring them vis‐à‐vis lenders for their credit contracts. They are the collateral or the “element of trust” in the credit contract between the borrower and the lender, representing a potential alternative in case of non‐repayment. This result is robust to alternative models and various robustness tests mitigating the potential endogeneity of remittances. A detailed analysis also shows that the relationship between remittances and credit markets is mainly driven by loans taken for consumption and food, in particular, as well as loans provided by informal institutions.

Trade disruptions, behavioral biases, and social influences: Can luxury sporting goods supply chains be immunized?

This paper studies a luxury sporting goods supply chain (LSGSC) experiencing trade disruption and market volatility. We propose a flexible trade credit contract with minimum order quantity (MOQ) and design a coordination mechanism between a supplier and a loss-averse wholesaler. We extend our study to a multi-tiered product setting and examine the impacts of social influences and loss aversion on SC decisions and channel coordination. Given the gloomy post-Covid-19 economic prospects in an era of reglobalization, this study urges trade associations and business leaders to immunize their SCs by considering behavioral biases and social influences and revisiting their contractual obligations.

Does forestland possession enhance households’ access to credit?—Examining China’s forestland mortgage policy

Many countries have seen a rising demand for forest policy reform. This paper explores the effects of China’s forestland mortgage policy, a supporting measure for collective forest tenure reform, on household credit access. In theory, the forestland mortgage policy could have three impacts on households: (1) forestland possession could change households’ willingness to access credit (2) forestland possession could enhance household access to credit, and (3) the contract structure follows the theoretical predictions of the credit contract design mechanism. Our results show that households’ willingness to enroll in the mortgage policy as well as their potential to obtain credit increased when households possessed larger areas of forestland. However, the proportion of households that successfully obtained credit were fairly modest. Meanwhile, we found a positive relationship between collateralized forestland and the amount of the forestland mortgage loan, and a negative relationship between collateralized forestland and the interest rate. These findings are consistent with the theoretical predictions of the contract mechanism design. The existing forestland mortgage policy has increased households’ credit access to some extent; however, there is much room for improvement from a policy perspective. This requires divising policy arrangements that would facilitate a fully developed credit market available to households. Forest tenure mortgage loans alone may not be able to fully meet households’ financial needs.

Court Efficiency and Aggregate Productivity: The Credit Channel

Credit contract enforcement influences financial market allocations and prices. Well-functioning credit markets enable firms to finance their operations. Can greater judicial efficiency therefore help to improve credit market allocations, by increasing firm dynamism and boosting aggregate productivity? We build a dynamic model of heterogeneous firms with short-term liquidity needs, in which two key features of enforcing credit contract proceedings, case resolution time and the expected recovery rate, directly affect credit supply. Once calibrated to replicate Italian firm dynamics, we use the model to analyze the extent to which court efficiency determines aggregate outcomes through the credit channel. In our economy, either increasing the average recovery rate on defaulted loans from 62 to 80 per cent, or reducing case resolution time from 9 to 5 years, raises average firm productivity by about 2 per cent. These gains are attained through a substantial improvement in the allocation of resources across firms.

DOES THE PROCYCLICALITY OF CAPITAL REQUIREMENTS AFFECT FINANCIAL STABILITY IN CEMAC?

The objective of this article is to analyze the effects of procyclical variations of the capital requirements for risk coverage on financial stability in the CEMAC[1]. In order to achieve this objective, we have specified and estimated a panel VAR model using the structural factorization method on quarterly Central Bank data over the period 2006-2017. Firstly, the results show that procyclical capital adjustments in the CEMAC region lead to short-term financial instability through the contraction of credit to the private sector. Secondly, despite the low level of financial development, the effects maintained by the adjustment of monetary policy instruments in the short term remain significant on price stability. Finally, in the long term, the procyclicality of regulatory capital makes it possible to revive economic activity and guarantee financial stability. These results lead us to recommend the adoption of a more discretionary monetary policy so as to make more procyclical the capital requirement.&#x0D; &#x0D; &#x0D; [1] Economic Community of Central African States comprising Cameroon, Central African Republic, Chad, Congo, Gabon and Equatorial Guinea.

Cross-border effects of regulatory spillovers: Evidence from Mexico

This paper studies the spillover of a macroprudential regulation in Spain to the Mexican financial system via Mexican subsidiaries of Spanish banks. The spillover caused a drop in the supply of household credit in Mexico. Municipalities with a higher exposure to Spanish subsidiaries experienced a larger contraction in household credit. These localized contractions caused a drop in macroeconomic activity in the local non-tradable sector. Estimates of the elasticity of loan demand by the non-tradable sector to changes in household credit supply range from 1.2–1.8. These results emphasize cross-border effects of regulations in the presence of global banks.