Credit Flows Research Articles

Relevance of Subsidies in Indian Housing Markets

India is the second largest developing economy in the world and is still expanding on its infrastructure base. One of the key sectors of investment is the real estate sector that addresses the basic necessities of a shelter and is guided by the thriving housing markets. Various studies conducted to understand the nature of market dynamics reveal that the housing demand is the highest in the LIG and EWS sections of the society. In order to meet up with the increasing pressure, the government has experimented with a range of approaches in policy-making. One of them is subsidizing housing for the lower income groups through techno-legal instruments. This paper examines the evolvement of the subsidy component over the years and the modalities associated with it. Based on theoretical evidences and qualitative assessment, it attempts to uncover the missing links between the devised mechanisms and their relevance to cater to the existing gaps. A comprehensive analysis shows that the subsidy policies are targeted towards the urban poor but not the informal shelter typologies that form a significant share of urban housing systems. Moreover, there is a lack of regulating the credit flow systems and inattention towards demand-side interventions. The author argues that it is imperative to increase ‘bankability’ of the informal sector and encourage periodic examinations to assess relevance of subsidies in Indian housing markets through seeking active participation from the local communities.

Is commercial bank lending in South Africa procyclical?

PurposeThis paper aims to examine the relationship between commercial bank lending and business cycle in South Africa. This paper attempts to know whether commercial bank lending in South Africa is procyclical.Design/methodology/approachThe model assumed that the lending behaviour is related to the business cycle. In this study, vector error correction model (VECM) is used to capture the relationship between bank lending and business cycle to accurately elicit the macroeconomic long-run relationship between business cycle and bank lending, as some banks might slow down bank lending due to some idiosyncratic factors that are not related to the downturn in the economy. This paper uses data from South African Reserve Bank for the period of 1990-2015 using VECM to understand the extent to which business cycle fluctuation can affect credit crunch in the financial system. The Johansen cointegration approach is used to ascertain whether there is indeed a long-run co-movement between credit growth and business cycle.FindingsResults from the VECM show that there are significant linkages among the variables, especially between credit to gross domestic product (GDP) and business cycle. The influence of business cycle is seen vividly after a period of four to five years, where business cycle explains 20 per cent of the variation in the credit to GDP. South African banks tend to change their lending behaviour during upturns and downturns. This result further confirms the assertion in theory that credit follows business cycle and can amplify credit crunch. The result shows that in the long run, fluctuations in the business cycle can influence the credit growth in South Africa.Research limitations/implicationsThe impulse analysis result shows that the impact of business cycle shock is very persistent and lasting. This also demonstrates that the shocks to the business cycle result have a persistent and long-lasting impact on credit. This study finds that commercial bank lending in South Africa is procyclical. It is suggested that the South African economy needs forward-looking policies that will mitigate the flow of credit to the real sector and at the same time ensure financial stability.Originality/valueMost research papers rarely distinguish between the demand side and supply side of credit procyclicality. This report is presented to develop an econometric model that will examine demand side procyclicality. This study adopts more realistic and novel methods that will help in explaining the relationship between bank lending and business cycle in South Africa, especially after the global financial crisis. This report is presented with a concise and detailed analysis and interpretation.

The Origins of Aggregate Fluctuations in a Credit Network Economy

I show that inter-firm lending plays an important role in business cycle fluctuations. I first build a tractable network model of the economy in which trade in intermediate goods is financed by supplier credit. In the model, a financial shock to one firm affects its ability to make payments to its suppliers. The credit linkages between firms propagate financial shocks, amplifying their aggregate effects by about 30 percent. To calibrate the model, I construct a proxy of inter-industry credit flows from firm- and industry-level data. I then estimate aggregate and idiosyncratic shocks to industries in the US and find that financial shocks are a prominent driver of cyclical fluctuations, accounting for two-thirds of the drop in industrial production during the Great Recession. Furthermore, idiosyncratic financial shocks to a few key industries can explain a considerable portion of these effects. In contrast, productivity shocks had a negligible impact during the recession.

Missing the cut? How threshold effects distort U.S. small business lending trends

This paper estimates a downward bias over time in official U.S. lending data series widely used to proxy credit flows to small businesses. The bias occurs because the upper loan origination size threshold used to proxy this lending is fixed and denominated in nominal currency, so its real value erodes over time due to inflation. Some advocates invoke the apparent declining small business lending trend to push governments to implement support programs for these businesses. The paper offers preliminary fully inflation-adjusted multipliers applicable to nominal lending data so that analysts may observe more accurate trends and better inform policy decisions.

Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit, and Global Financial Cycles

We analyze whether the global financial cycle (GFC) affects local credit supply and the real effects, and whether local unconventional policies can attenuate such spillovers. For identification, we exploit GFC shocks, differential bank reliance on global funding, local central bank interventions in FX derivatives, and three matched administrative registers in Brazil: the register of foreign credit flows to domestic banks, the credit register, and the matched employer-employee register. We show that after the announcement of US Quantitative Easing tapering by Bernanke in May 2013, which is associated with massive FX depreciation and increased volatility, domestic banks with larger foreign liabilities reduce the supply of credit to firms, in turn reducing employment. However, these negative effects are attenuated after the Central Bank of Brazil announces a large intervention in the FX derivatives market, which consists in supplying insurance against FX risks â?? hedger of last resort. In addition to these two subsequent shocks, we also analyze a panel over 2008-2015. Banks with larger foreign liabilities cut credit supply after US Dollar appreciation or after an increase of FX volatility (even for US FX changes with EMs excluding Brazil). Moreover, the FX effects on credit supply and real effects are mitigated after the FX intervention of the central bank, thereby confirming that the policy of hedger of last resort has been effective in decreasing local economy spillovers to global financial conditions. Our results have important implications for international macro-finance models and policy.

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Would DSGE Models Have Predicted the Great Recession in Austria?

Dynamic stochastic general equilibrium (DSGE) models are the common workhorse of modern macroeconomic theory. Whereas story-telling and policy analysis were in the forefront of applications since its inception, the forecasting perspective of DSGE models is only recently topical. In this study, we perform a post-mortem analysis of the predictive power of DSGE models in the case of Austria’s Great Recession in 2009. For this purpose, eight DSGE models with different characteristics (small and large models; closed and open economy models; one and two-country models) were used. The initial hypothesis was that DSGE models are inferior in ex-ante forecasting a crisis. Surprisingly however, it turned out that not all but those models which implemented features of the causes of the global financial crisis (like financial frictions or interbank credit flows) could not only detect the turning point of the Austrian business cycle early in 2008 but they also succeeded in forecasting the following severe recession in 2009. In comparison, non-DSGE methods like the ex-ante forecast with the Global Economic (Macro) Model of Oxford Economics and WIFO’s expert forecasts performed comparable or better than most DSGE models in the crisis.

Aggregate volatility and international dynamics. The role of credit supply

Changes in country-specific aggregate volatility are positively correlated with the current account but negatively correlated with investment, output and credit flows. An International Real Business Cycle model with time-varying aggregate uncertainty, through a precautionary savings channel, can account for the positive correlation but implies counterfactual comovements for the other variables. Adding a credit supply channel with default and lenders exposed to aggregate risk allows the model to match all the facts. Higher volatility contracts credit supply and lowers investment and output. The current account turns to a surplus because savings increase, but also because investment collapses.

Constructal Law of Institutions within Social Organizations

This work looked for a unifying theory between physical-biological domain and social sciences. Constructal law unified physical and biological domain by telling the general sense in which flow systems tend to evolve. Management theory looks for relations between institutions and human agency. Although being state of mind entities, institutions follow constructal law. This work proposed the main organization flows are information and credit. Biologic instincts derived from Darwinian natural selection are the driving or blocking forces of such flows. Once biologic instincts systematically block information and credit flows in large numbers, this work proposed every human organization must have institutions to inhibit some behaviors. Those institutions need to be present, at least partially, in formal rules of social groups. This way it is possible to predict expansion or downfall of human groups using objective and quantifiable data. Therefore, further studies may employ classical history to confirm this theory. This work analyzed some case studies to show qualitatively the application of proposed theory. Concluding, this work gave physically-biologically grounded guidance for institutional changes.

Agricultural Financing and Microfinance Industry in Rwanda: Growth, Trends and Challenges

Micro-finance institutions can help build the foundation of the economy and help to increase the GDP of the countries in Africa. Micro-finance sector plays a very important role in the Rwandan economy. The Government of Rwanda considers financial sector development to be a high priority to expand financial services such as access to credit and savings mobilization and to mobilize long- term capital for investment. In Rwanda, the overall flow of institution credit has increased over the year, there several gaps in the system like scarce provision of credit to small and marginal farmers, limitations to formal agriculture financing due to the risks that are inherent to agriculture and paucity of medium and long-term lending. This study sought to study the trends of microfinance and to analyze the growth of agricultural credit in Rwanda. The secondary data used were based on the data gathering from different sources of published and non-published Journals, National Bank of Rwanda reports, Thesis and Rwandan Government reports. The study shows that short and medium- term credit provided to farmers have been the main sourced through financial institutions. The study revealed also that the major causes of non-performance of loans in Rwanda s ’ micro-finance institutions are weak internal capacities of microfinance institutions, inappropriate repayment capacity, lack of customer's education, inadequate collateralization and judicial processes, poor follow-up mechanisms, lack of supervision and lending at high interest rate to borrowers. The emerging keyschallenges in the Rwandan microfinance Industry are limitation of the institutional capacity, poor credit culture for rural client's microfinance, lack of transparency and communication, lack of Risk management systems and inadequate infrastructure. These have major implications for agricultural development as also the well being of the farming community. Efforts are therefore required to address and rectify these issues.

Financial Innovation and Economic Growth: Empirical Evidence from China, India and Pakistan

This study investigates the causal relationship between financial innovation and economic growth in China, India, and Pakistan over the period of 1970-2016. Using an Auto-regressive Distributed Lag (ARDL) bound testing and Granger causality-based Error Correction Model (ECM), this study finds that financial innovation generally has a positive and statistically significant impact on economic growth in the short-run and long-run. This results show that in the long-run, monetary management and credit flow to the private sector play an essential role in economic growth. The trade openness and gross capital formation contribute considerably to the economic growth in China, India, and Pakistan. For robustness, this study also applies the Dynamic Ordinary Least square (DOLS) and Fully Modified Ordinary Least Square (FMOLS) method. The findings of this study suggest that financial sector plays an important role in supporting innovation activity in Asian countries.

Kiwi value chain in Arunachal Pradesh: issues and prospects

This paper examines some issues related to the production and marketing of kiwi in Arunachal Pradesh, the largest producer of kiwis in India. It contributes 56.5% of the total 8.5 thousand tons of kiwis produced in the country. India imports 75% of its domestic demand for fresh kiwis and, therefore, there is huge scope to upscale kiwi production in north-eastern states in general and Arunachal Pradesh in particular. However, developing an efficient value chain is a challenge because of several infrastructural and institutional constraints like the non-availability of reliable data on production, lack of research and extension support, lack of organized marketing and post-harvest infrastructure, poor credit support, etc. A few solutions suggested for upscaling the kiwi production are: the formation of ‘Kiwi Producers Groups (KPGs)’, a dedicated research centre for kiwi, and sufficient credit flow to farmers.

Hot money in disaggregated capital flows

ABSTRACTWe explore the possible existence and behavior of hot money in six categories of disaggregated bilateral capital flows (equity inflows, equity outflows, bond inflows, bond outflows, banking credit inflows, and banking credit outflows) for 12 emerging markets vis-à-vis the US from 1995 to 2012 and provides several new findings. First, we identify the existence of hot money in all six categories above and conclude that both gross inflows and gross outflows can be the sources of hot money. Second, hot money in equity inflows (outflows) engages in positive (negative) feedback trading regarding local stock market returns. Third, some categories of hot money have a temporary influence on local stock market returns while the others have a permanent influence, supporting the explanations of both price pressures and information advantage. Finally, local stock market returns in half of our sample countries, which have tightened capital controls during the late 2000s global financial crisis (GFC), are more affected by hot money than in the other half. Our findings confirm several popular conjectures of hot money, and endorse the use of capital controls to limit financial vulnerability in the run-up to and during the GFC.

International credit supply shocks

House prices and exchange rates can potentially amplify the expansionary effect of capital inflows. We first set up a model of collateralized borrowing in domestic and foreign currency with international financial intermediation in which a change in leverage of global intermediaries leads to an international credit supply increase. In this environment, we illustrate how house price increases and exchange rates appreciations contribute to fueling the boom by inflating the value of collateral. We then document empirically, in a Panel VAR model for 50 advanced and emerging countries estimated with quarterly data from 1985 to 2012, that an increase in the leverage of US Broker-Dealers also leads to an increase in cross-border credit flows, a house price and consumption boom, a real exchange rate appreciation and a current account deterioration consistent with the transmission in the model. Finally, we study the sensitivity of the consumption and asset price response to such a shock, and show that country differences are associated with the level of the maximum loan-to-value ratio and the share of foreign currency denominated credit.

Government Credit, a Double‐Edged Sword: Evidence from the China Development Bank

ABSTRACTUsing proprietary data from the China Development Bank (CDB), this paper examines the effects of government credit on firm activities. Tracing the effects of government credit across different levels of the supply chain, I find that CDB industrial loans to state‐owned enterprises (SOEs) crowd out private firms in the same industry but crowd in private firms in downstream industries. On average, a $1 increase in CDB SOE loans leads to a $0.20 decrease in private firms' assets. Moreover, CDB infrastructure loans crowd in private firms. I use exogenous timing of municipal politicians' turnover as an instrument for CDB credit flows.

ТЕНДЕНЦІЇ ТА ФАКТОРНІ УМОВИ СТАБІЛЬНОСТІ КРЕДИТНИХ ПОТОКІВ БАНКІВ: УКРАЇНСЬКИЙ ВИПАДОК

The present article analyses the tendencies and factor conditions of credit flows stability, as one of the main components of the banking activity in Ukraine. Using an econometric investigation we achieved sufficient basis to assume the existence of a tight bound between credit , deposit rates and the movement of credit flows. Credit regulation is used to soften the economic crises and keep in check the inflation rate. To support the conjuncture, the government uses credit to stimulate the financial investments into different areas of the national economy. Credit policy is carried out by the means of direct or indirect approach. The difference between then is that the central bank either uses liquidity of the credit institutes to apply indirect control, or uses direct limits to economical credits (limits the credit quantity). Defined the importance of interconnected analysis of the functioning of economics and banking sector. Singled out several steps of issuance of loans to the banks in the economics of the Ukraine. Analyzed the factor conditions of credit banking activity development. Outlined the importance of the deposit and credit interest influence upon the persistence of credit inflows of the banks.

Reduced cross-border lending and financing costs of SMEs

This paper investigates how the withdrawal of banks from their cross-border business impacted the borrowing costs of European firms since the crisis. We combine aggregate information on total and cross-border credit with firm-level survey data for the period 2010–2014. We find that the decline in cross-border lending led to a deterioration in the borrowing conditions of small firms. In countries with more pronounced reductions in cross-border credit inflows, the likelihood of a rise in firms’ external financing costs increased. This result is mainly driven by the interbank channel, which plays a crucial role in transmitting shocks to the real sector across borders.

Spillovers of the United States’ Unconventional Monetary Policy to Emerging Asia: The Bank Lending Channel

ABSTRACTThis article assesses the spillover effects of the United States’ unconventional monetary policy (i.e., quantitative easing programs adopted during 2008–2014) on the Asian credit market. Focusing on cross-border bank lending, we employed firm-level loan data with regard to the syndicated loan market and measured the international bank lending channel through changes in the United States dollar-denominated loans extended to Asian borrowers. We found that the growth of dollar credit in Asia increased substantially in response to the quantitative easing in the US financial market. The results of this study confirm the existence of the bank lending channel in Asia and emphasize the role of credit flows in transmitting financial conditions. The article also provides new evidence of cross-border liquidity spillover in the syndicated loan market. We found that the overall spillover effect was large but differed significantly in Asia by types of borrowing firms, financing purposes, and loan terms at different stages of the quantitative easing programs.

DESTABILIZING EFFECTS OF BANK OVERLEVERAGING ON REAL ACTIVITY—AN ANALYSIS BASED ON A THRESHOLD MCS-GVAR

We investigate the consequences of overleveraging and the potential for destabilizing effects arising from financial- and real-sector interactions. In a theoretical framework, we model overleveraging and demonstrate how a highly leveraged banking system can lead to unstable dynamics and downward spirals. Inspired by models developed by Brunnermeier, Sannikov and Stein, we empirically measure the deviation-from-optimal-leverage for a sample of large EU banks. This measure of overleveraging is used to condition the joint dynamics of credit flows and macroeconomic activity in a large-scale regime change model: a Threshold Mixed-Cross-Section Global Vector Autoregressive (T-MCS-GVAR). The regime-switching component of the model is meant to make the relationship between credit and real activity dependent on the extent to which the banking system is overleveraged. We find significant nonlinearities as a function of overleverage. The farther the observed leverage in the banking system from optimal leverage, the more detrimental is the effect of a deleveraging shock on credit supply and economic activity.