Credit Supply Research Articles

Credit Provision and Stock Trading: Evidence from the South Sea Bubble

Abstract This article studies the relationship between credit provision and stock trading behavior. We collect every stock transaction of the three major British companies during the 1720 South Sea Bubble and link stock trading to margin loan positions with the Bank of England. We give insights in the selection of traders into the loan facility by comparing the trading behavior and realized returns of borrowers to other traders. We find that loan holders are more likely to buy following high returns and document strong underperformance of borrowers.

Sorting out the effect of credit supply

We document that banks that cut lending more during the Great Recession were lending to riskier firms ex-ante. To understand the aggregate implications of this sorting pattern, we build an assignment model in which banks have heterogeneous costs to take on risky loans and firms have different credit risks. In the model, aggregate loan volume depends on the entire distribution of bank holding costs and firm credit risks. We then use our model to recover the change in the distribution of bank holding costs during the Great Recession and show that it explains two-thirds of the decline of aggregate loan volume during this period.

The Cost of Bank Regulatory Capital

Abstract Basel I introduced capital requirements for undrawn commitments, but only for revolvers with an original maturity greater than one year. We use this regulatory discontinuity to estimate the impact of capital regulation on the cost and composition of credit. Following Basel I, short-term commitment fees declined relative to long-term commitments and issuance of short-term facilities increased. Our results highlight the sensitivity of credit provision to capital regulation, particularly for banks with less capital. We are able to infer that low-capital banks are willing to forego twice as much income from fees to reduce required regulatory capital by a dollar.

Digital currency and blockchain security in accelerating financial stability: A mediating role of credit supply

This study examines how blockchain and digital currency have affected the supply of credit and financial stability. It pays particular attention to industry-based analyses and options presented by cryptocurrencies, stablecoins, and digital currencies for the credit supply and financial stability. A positivistic or quantitative research design is employed. The method of data collection is a survey-based questionnaire, as well as the time interval data method, from December 2021 to December 2022. The study sample comprises of five industrial zones of Punjab. The respondents are businessmen, managers, and employees (N = 449). The study finds that the use of various digital currencies quickly transforms business. The study shows that most industries do not require central banks and, instead, concentrate on modern digital currency and blockchain systems for monetary transfers. The private and public models of physical money will likely fail in the future. Rather, central banks should adopt digital currency and blockchain with an online technological payment strategy in order to enhance domestic financial stability and payment systems.

A Review of the Financial Sector Impacts of Risks Associated with Climate Change

This article reviews the literature on the financial sector impacts of natural disasters and physical climate change risks, covering banking, insurance, stock markets, bond markets, and international financial flows. Most studies have applied statistical approaches to historical data from developed countries to identify these impacts, while some have also used theoretical and computational modeling to assess future risks under climate change scenarios. The findings show that natural disasters and climate change risks generally lower insurer profitability and risk-sharing capacity, bank stability and credit supply, returns and stability of stock and bond markets, foreign direct investment inflows, and international lending. Factors such as income levels, rigorous financial regulations, capital abundance, market diversification, and adaptation strategies mitigate the negative effects. Natural disasters increase remittance inflows and financial assistance to low- and middle-income countries. We recommend future research on forward-looking computational modeling to assess the future financial sector impacts of climate change, while accounting for adaptation actions and their drivers. Future research should also consider hazard correlations and the interactions between financial industries and regions to more comprehensively assess the economic effects of natural disasters in general and for vulnerable countries in particular.

Credit supply shocks, home purchase volume, and borrowing behavior

AbstractWe exploit the 2007 private label securitization (PLS) freeze as a quasi‐experiment to study the impact of a negative credit supply shock on home purchases and borrowing behavior. Using a difference‐in‐differences estimator, we show that a negative supply shock to first‐lien mortgages has little impact on the volume of purchases financed with a mortgage, but significantly reduces the average first‐lien loan balance. Much of this reduction in loan balances is the result of increased bunching at the conforming loan limit that is achieved through a combination of greater second mortgage utilization and larger downpayments. Importantly, we find significant heterogeneity in the response to the mortgage supply shock across borrower characteristics and house price levels. Home purchase volume does decline after the shock for less creditworthy borrowers and in expensive locations. The reduction in first‐lien balances is fairly uniform across borrower types, however, the effect is slightly more acute in less expensive areas. Our results suggest that financial market frictions (e.g., downpayment constraints, imperfect credit) play an important role in determining how credit supply shocks impact housing purchases and borrowing behavior.

Bank Supervision and Corporate Credit Supply

We exploit the quasi-random assignment of federal bank examiners to syndicated loans to study the effect of supervision on corporate lending. Following supervisory rating downgrades, banks decrease credit commitments and downgrade internal risk assessments. Borrowers face larger commitment reductions whenever banks have low ex ante screening and monitoring incentives or whenever examiners’ assessments contain more information than banks’ assessments, suggesting that examinations complement bank monitoring. Although public firms can offset the loss of bank credit by tapping external capital markets, smaller and more opaque private firms draw on internal cash balances instead and reduce investment and sales growth. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4854 .

Effect of information disclosure on firms' direct financing in emerging securities markets

In the 1990s, the significant emergence and evolution of securities markets or direct financing not only substantially affected credit suppliers' lending activities but also profoundly altered the financing patterns of businesses in developing countries. Therefore, this study examines heterogeneous firms' emerging use of long-term securities financing mainly from the perspectives of asymmetric information and the types of fund providers. The intertemporal maximization framework theoretically suggests that firms with a greater degree of information disclosure may prefer direct financing over indirect financing in their long-term financial arrangements. In addition, economic recession or stagnation could contribute to a higher level of long-term securities financing. This study employs panel data models and the Tobit model to analyze the emerging direct financing patterns in a panel dataset comprising 131 Taiwanese listed companies from 1989 to 2000. The empirical results support the theoretical findings. The results suggest a positive relationship between the degree of information disclosure and firms' intertemporal level of long-term direct financing, which directly contributes to the development of securities markets and the establishment of balanced financial infrastructure in developing countries. The influence of information disclosure variables (the fund providers paradigm) on firms' emerging direct financing in a developing country outweighs that of the capital structure variables (the securities types paradigm).

Breaking the Bank: Effects of Domestic Conflict on the Banking Sector in Turkey

ABSTRACT Although banks occupy a central role in most (post-)conflict situations, there is a perplexing lack of attention to them in studies of political violence. As a case experiencing domestic conflict with varying degrees in the last decades, Turkey offers opportunities to understand how the banking sector, including state deposit banks, responds to such political violence. We focus on the short-term impact of political violence and address the following questions: Do all actors in the sector respond in similar ways to security threats? Is there variation according to conflict intensity? We shed light on these puzzles with an analysis of original data on bank ownership, bank branches, bank deposit amounts, and bank credits. We show that banks with profit incentives respond to conflict by lowering their presence in provinces hit by these attacks. In comparison, our finding that deposits in high conflict intensity areas are not affected suggests that it is indeed economic actors outside high intensity regions that are more sensitive to short-time changes in security compared to local ones. Overall, the results demonstrate that political violence hurts banks’ presence in conflict locations and their presence matters through credit provision to these areas.

Current Account Imbalances, House Prices, and Institutions

Current account imbalances and housing price boom-bust cycles have become the defining characteristics of the pre-global financial crisis period. In the same period, it is observed that even though the developments of the economies show similar trends in many countries (e.g. an increase in credit supply, a decrease in interest rates), they have distinct characteristics (e.g. the volatility of house prices, and level of current account imbalances). Additionally, their final impacts on the economy vary to a significant degree from country to country. The institutional features of the markets (e.g. accessibility of credit information, protection of investors) have the potential to contribute to this differentiation. However, there are no studies on the effect of institutional features on the relationship between house prices and current account imbalances. The aim of this study is to examine the relationship between house prices and current account imbalances as well as the role of institutions in this relationship for 14 EU countries. To do so, a simultaneous equations model is used. The results of the empirical analysis show that in the 2007-2008 global financial crisis, there is a positive and significant relationship between house prices and current account imbalances, and institutional features have a potential role in the strength of this relationship.

Cyber-attacks and banking intermediation

Using data from 2144 U.S. banks over the period 2011-2019, this article highlights that cyber-attacks affect bank intermediation through a reduction in deposit collection, and credit supply.

Implementation of an Accounting Information Systems for Fast Secure Credit

This study aims to analyze the use of an accounting information system for providing fast secure credit at PT Pegadaian Pelita Makassar branch. Fast Safe Credit is a credit that aims to provide loans for customers based on pawn law with fast procedures, easy regulations, and safe with loans ranging from fifty thousand rupiah to one billion rupiah. The research uses a qualitative approach with primary data from interviews with appraisers, collateral managers, and cashiers. Secondary data from documents on secured fast lending. The results showed that PT Pegadaian has used an accounting information system and has succeeded in supporting the smooth provision of fast and secure credit, especially through the PASSION application to facilitate the process of applying for and granting credit

Does financial cycle affect corporate bond ratings? – Evidence from macro and micro interaction effects

In recent years, China's bond market defaults frequently, and the credibility of credit rating agencies needs to be tested. The disorganized bond market increases the systemic risk in China, which is not conducive to the smooth operation of the social economy. This paper studies effects of financial cycle on credit rating by constructing a game model between enterprises and credit rating agencies. Regression test results of A-share listed companies from 2010 to 2019 show that the financial cycle can promote the willingness of enterprises to hold bonds, which affects the further game between enterprises and rating agencies and promotes the "pro-cyclical" upgrade of ratings. Further exploration shows that large-scale, non-listed and non-industrial companies are more sensitive to financial cycles. The contributions of this paper are as follows: First, this paper discusses the mechanism by which financial cycle affects credit rating through the influence of corporate bond financing behaviour, and expands a new research perspective for the study of how macroeconomic factors affect credit rating; Second, it clarifies the logic of credit rating changes. In the modelling process of this paper, the influence of complex endogeneity is fully taken into account, and it is verified that when the external credit supply changes, corporate financing decisions will be affected first, and credit ratings will be affected later. The research conclusions of this paper have important implications for how to regulate the behaviour of rating agencies and improve the quality of ratings.

Labour-Use Efficiency of Rice Farmers in Nigeria’s North-Central Region

A cross-sectional data collected through structured questionnaire coupled with an interview schedule from 360 rice farmers selected via a multi-stage sampling technique was used to determine the labour efficiency of rice farmers in Nigeria’s North-Central region. Both descriptive and inferential statistics were used to analyze the 2020 cropping season data. The empirical evidences showed a farming population that is gender biased due to gender stereotype, thus affected women’s access to and control over productive resources. Besides, economic-productive people that explored pecuniary advantages to achieve economies of scale engaged in cultivation of thinly uneconomic holding. The poor economic status of the farm families made most of the farmers to rely on family labour for farm operations, thus keeping most of their children and young ones out of school. Furthermore, most of the farmers were fairly efficient in the use of labour with little technical support required to enable them to achieve optimum labour efficiency level (frontier point). However, the empirical evidences showed competition for labour demand between farm and off-farm activities, and, conservative and complacency attitudes due to longevity in the enterprise to be the factors that affected labour efficiency. Therefore, the study calls for gender mainstreaming in the agricultural budget to overcome women’s challenge on productive resources; incentivized the enterprise viz. credit provision; and, adoption of a bottom-to-top approach in research and practical demonstration approach in the transfer of innovative rice technologies.

Penerapan Metode Algoritma C4.5 dalam Penilaian Kelayakan Pemberian Kredit Kepada Mitra Usaha PT Arita Prima Sukses

This research aims to investigate the application of the C4.5 algorithm method in assessing the feasibility of granting credit to business partners by PT Arita Prima Sukses. PT Arita Prima Sukses is a financial industry company with various business partners in need of financial support for their growth. The decision-making process regarding the provision of credit to business partners is a critical aspect of the company's risk management. The C4.5 method is one of the artificial intelligence methods used for decision-making based on rules identified from historical data. This research collects and analyzes historical data on credit approval for business partners by PT Arita Prima Sukses. The C4.5 method is then implemented to generate a predictive model that can assist in assessing the feasibility of future credit approvals. The results of the research indicate that the C4.5 method can significantly contribute to improving the accuracy of assessing the feasibility of granting credit to business partners. With this model, the company can be more effective in identifying potential risks and optimizing their credit portfolio. The implications of this research include enhancements in risk management and the potential for increased company profitability.

Bank-platform competition in the credit market

We analyze the equilibrium in the credit market when a bank and a lending platform compete to offer credit to borrowers. The platform does not manage deposit accounts, but acts as an intermediary between the borrower and investor, offering a risky contract such that the investor is only reimbursed if the borrower is successful. We show that the platform business model of financial intermediation may generate unexpected effects in the credit market. In particular, investor participation in the platform sometimes decreases when the platform attracts better-quality borrowers. When it competes with the platform, depending on the respective distributions of borrower and investor types, the bank may expand the supply of credit to low-quality borrowers, or restrict it to high-quality borrowers. Bank-platform competition expands the total supply of credit, but has an ambiguous impact on borrower surplus, because some borrowers may have higher repayments.

Big broad banks: how does cross-selling affect lending?

Abstract This article investigates how cross-selling affects relationship lending using internal data from a large bank and the Swedish credit registry. I show that within a bank–firm relationship, profit earned from non-loan products cross-subsidizes loans and increases (1) credit supply and (2) the likelihood of the bank’s pausing or waiving interest payments for delinquent loans (lenience in delinquency). For identification, I exploit the Basel II-induced exogenous variation in products’ profitability while holding constant the firm’s creditworthiness and relationship informativeness. I find that the average affected firm experienced a decrease of 6 percent ($400,000) in credit supply and 30 percent (9.8 pp) in lenience in delinquency. The results highlight the importance of cross-subsidization as a mechanism through which cross-selling affects bank–firm relationships and inform optimal regulatory design for lenders who multi-produce.

Trade credit provision and stock price crash risk

We investigate the influence of trade-credit provision on stock-price crash risk in an emerging-market setting. Using a sample of Chinese listed firms, we find that trade credit provision significantly increases stock-price crash risk. Results are economically significant and robust to different measures of crash risk, alternative trade-credit calculations, and multiple model specifications. We interpret our results that, in China, an emerging market with a less developed credit environment, trade credit provision increases stock-price crash risk particularly through an information channel, this link being heightened when firm information asymmetry is more severe. We contribute to the relatively little research on how extension of credit by firms impacts their financial stability. Findings should be of great interest to scholars interested in the role of information disclosure in emerging financial markets; as well as to investors and regulators concerned about stock-price crash risk.

The amplification effects of adverse selection in mortgage credit supply

This paper studies how information frictions in the securitization market amplify the response of mortgage credit supply to house price shocks. Securitization prices and quantities endogenously result from an optimal contracting problem between investors and banks. Banks are better informed than investors about the quality of mortgages they originate, leading to adverse selection in securitization. Investors use the quantity sold as a screening device to induce banks to reveal truthful information. We find that adverse selection amplifies the response of a bank’s mortgage credit to house price shocks. The degree of amplification is also a function of the technological differences in managing portfolios between banks and investors. The model is informative on how information frictions can induce large fluctuations in mortgage credit supply.

Did doubling reserve requirements cause the 1937–38 recession? New evidence on the impact of reserve requirements on bank reserve demand and lending

In 1936–37, the Federal Reserve doubled member banks’ reserve requirements. Friedman and Schwartz (1963) famously argued that the doubling increased reserve demand and forced the money supply to contract, which they argued caused the recession of 1937–38. Using a new database on individual banks, we find that higher reserve requirements did not generally increase banks’ reserve demand or contract lending because reserve requirements were not binding for most banks. Aggregate effects on credit supply from reserve requirement increases were therefore economically small and statistically zero.