Credit Supply Research Articles

Exchange rate risk, banks' currency mismatches, and credit supply

We exploit the post-Brexit depreciation of the British pound as an exogenous shock to show how exchange rate shocks transmit to the German real economy through the banking sector. German banks with GBP currency mismatches (between assets and liabilities, including off-balance sheet items) suffer losses when the currency of assets depreciates relative to that of liabilities, which they internalize by cutting back credit supply. For a one percentage-point loss in equity, a bank cuts credit supply by 73 basis points on average, with stronger effects for banks with lower equity capital. The credit contraction of German banks (i) affects also firms that are not directly related to UK conditions, (ii) holds across all industries, including non-tradable sectors, (iii) impacts relatively more small borrowers, and (iv) decreases affected firms' investments.

China’s Monetary Policy and the Loan Market: How Strong is the Credit Channel in China?

AbstractWe study the macroeconomic relevance of credit supply effects in the transmission of Chinese monetary policy. Using combinations of zero and sign restrictions in a structural vector autoregressive framework, we simultaneously identify monetary policy shocks and supply dynamics in the loan market. Our results show that policy shocks which coincide with loan supply effects account for roughly 60% of the overall effects of policy induced output dynamics. Moreover, we find that it takes roughly one year that banks adjust their lending strategies and loan supply effects unfold completely. Overall, our results provide robust empirical evidence that the credit channel constitutes an important and economically relevant transmission channel for monetary policy in China.

The Impact of Formal Agricultural Credit on Farm Productivity and Its Utilization in Khyber Pakhtunkhwa, Pakistan

Agricultural mechanization and the use of mixed inputs ensure higher productivity. In this regard, the Government of Pakistan has executed an approach for the provision of agricultural credit to smallholders for improving agricultural production. However, many issues are involved in the extent, utilization and impacts of credit. This study aims to explore the impact of credit, its utilization, misuse and factors determining the extent of agricultural credit in Pakistan. A semi-structured questionnaire was developed to collect data from 316 farmers in Mardan District. The study was analyzed through statistical tools such as a paired t-test, ANOVA and multiple regressions. Results showed that agricultural credit enhanced crops’ production. However, according to percentage use, misuse of the credit was more common than its proper utilization. Farmers utilized credit for land preparation, fertilizers, seeds, pesticides and daily labor. They misused agricultural credit for healthcare, education of children, domestic needs and business. Results of the regression model showed that farmers’ age, experience, farm size, farm income, farm labor and land ownership were determinants of the extent of agricultural credit. Policy measures should be taken to stop the misuse of agricultural credit to achieve the target set for agricultural productivity.

Why do banks use credit default swaps (CDS)? A systematic review

AbstractCredit default swaps (CDS)—the fiercely discussed derivatives instrument since the explosion of the recent global credit crunch—are still subject to considerable theoretical and practical debate. More than a decade after significant developments in CDS literature, we currently lack a holistic understanding of the disparate strands of evidence, synthesizing analytical advancements in the field. We, therefore, conducted a systematic review of 143 publications (peer‐reviewed and first‐tier grey literature), focusing on three key areas: CDS characteristics and development, credit risk hedging, and determinants of CDS use, and performed the first bibliometric mapping for CDS. Our review makes the following contributions. First, measuring CDS characteristics and development gives a snapshot of how CDS remained a significant indicator for hedging corporate lending risk. Second, by mapping the research landscape, we provide insights into banks’ use of CDS; in particular, we show that banks use CDS to obtain capital relief, enhance liquidity and profitability, limit credit supply, and consequently mitigate their NPLs’ level. Moreover, the use of CDS by lenders increases firms’ leverage and value. Leaving a fertile area for debates and future research, the outcomes of this review help provide policy guidance to regulators and financial institutions that make informed decisions to use CDS as a credit risk management instrument.

Riesgo climático y oferta de crédito en España

Rationale The 2015 Paris Agreement is a milestone in the global fight against climate change. Against this backdrop, and as a result of credit institutions’ alignment with the agreement, it is important to analyse its impact on lending to firms. Takeaways •The 2015 Paris Agreement represents one of the first initiatives intended to foster the transition to a greener economy and, consequently, to reduce carbon dioxide (CO2) emissions. •The findings of this article show that lending by Spanish credit institutions to more polluting firms appears to have declined somewhat between 2014 and 2019. •The evidence presented also suggests that, during that period, the banks most exposed to climate risk reduced their supply of credit to firms operating in more polluting sectors in order to mitigate this risk. However, in quantitative terms, the effects are moderate.

Non-Bank Finance and Monetary Policy Transmission in Asia

ABSTRACT Focusing on Asian economies over the period 2006 to 2019, we find that while non-bank finance appears to complement rather than substitute credit provision by the traditional banking sector, weaker regulatory quality is an important driving factor. Moreover, while we find that central bank policy rates countercyclically affect credit provision by non-banks, impulse responses to monetary policy shocks with and without non-bank finance indicate that the effectiveness of monetary policy as a transmission channel to GDP growth, inflation, house prices, and traditional bank credit is weakened in the presence of non-bank finance. Our paper has implications for monetary policy implementation, potentially incorporating non-banks into central bank operations and liquidity provision, as well as for financial supervisors on mitigating regulatory arbitrage.

Interbank network and banks' credit supply

Interbank network and banks' credit supply

A decomposition analysis of microcredit welfare gaps in Ghana. A gender analysis

The literature is replete with studies suggesting that the microcredit market is expanding with varying degrees of impact on male and female clients. The paper investigates the extent to which differences in loan use behaviour and loan amount received contribute to differences in microcredit welfare impact among male and female clients. Using the sixth (2012/2013) and seventh (2016/2017) rounds of the Ghana Living Standards Survey, and applying the Oaxaca-Blinder decomposition technique with the two-staged recentred influence functions, we find that the welfare disparity in microcredit delivery is due to a lower inequality and poverty rate among female clients relative to their male counterparts. Additionally, we find that gender welfare gaps in microcredit delivery are powered extensively by differences in the size of loans received and the loan use behaviour of clients. The findings lend support for policy reassessment on gender in the provision of credit; to improve portfolio quality and reinforce the returns of microcredit access among clients.

Bank Funding Risk, Reference Rates, and Credit Supply

Bank Funding Risk, Reference Rates, and Credit Supply

Effect of Abnormal Increase in Credit Supply on Economic Growth in Nigeria

Effect of Abnormal Increase in Credit Supply on Economic Growth in Nigeria

Mandatory Climate Risk Disclosure, Housing Prices, and Credit Supply

Mandatory Climate Risk Disclosure, Housing Prices, and Credit Supply

Banking Heterogeneity, Credit Supply and Economic Growth

Banking Heterogeneity, Credit Supply and Economic Growth

Stronger Local Housing Cycle: How Credit Supply and Housing Policy Shape It

Stronger Local Housing Cycle: How Credit Supply and Housing Policy Shape It

When Broadband Comes to Banks: Credit Supply, Market Structure, and Information Acquisition

When Broadband Comes to Banks: Credit Supply, Market Structure, and Information Acquisition

Climate Risk, Soft Information, and Credit Supply

Climate Risk, Soft Information, and Credit Supply

Alternative Analysis of Bank Lending Channel in Turkey After 2010

Traditional bank lending channel in the monetary transmission explains the relationship between monetary policies of Central Banks and the bank lending behavior. In this article, the existence of traditional bank lending channel and an alternative analysis of bank lending in the monetary transmission of Turkey is investigated between 2011 and 2018 using bank level data and GMM method. Additionally, we indicate whether the reaction of banks differ according to their bank specific caharacteristics. Asset quality, capital adequacy, liquidity ratio, asset size and profitability rates are used as bank characteristics. Since Central Bank of Turkey began to use multiple monetary policy tools to cope with financial stability issues at the end of 2010, the choice of an indicator for the monetary policy is important. In this article, we revise the analysis of bank lending view as the key assumptions of traditional bank lending are not valid. Different from prior research, to analyze the change in credit supply we use both monetary policy rates and actual interest rates (BISTREPO and weighted average cost of Central Bank of Turkish Republic) as monetary policy indicators. Using monetary policy rates, our findings indicate that traditional bank lending channel does not work. Using BISTREPO as monetary policy indicator, our findings indicate that it is significant in the credit supply change. Taking the bank characteristics into account only bank size is significant in mitigating the negative effects of monetary policy shocks. This finding shows that banks that have larger asset size may find different funding alternatives and continue to lend during monetary policy shocks. Additionally, when weighted average cost of the CBTR funding are used as a monetary policy indicator, our findings show that this rate is also significant in the credit supply change and similar to prior results higher bank size may mitigate the negative effects of monetary policy shocks.

International Monetary Policy, Credit Supply, and Bank Lending Channels

International Monetary Policy, Credit Supply, and Bank Lending Channels

Earnings quality and trade credit in the Gulf Cooperation Council

The primary concern of credit providers is the timely payment of obligations by clients, as most clients tend to pay their obligations late. To obtain accurate information from their buyers, credit providers need to rely on financial reporting or other information channels. The purpose of this study is to investigate the impact of earnings quality on trade credit, with a focus on the moderating role of accounting information comparability. We used Refinitiv Eikon and Fitch Connect databases to measure the variables. The study utilized financial information from 250 companies listed on the Gulf Cooperation Council (GCC), and six countries’ stock exchanges between 2016 and 2021 with 1500 firm-year observations. Panel data regression models were used to test the research hypotheses. This study aims to answer if earnings quality has an impact on trade credit and if the impact of earnings quality on trade credit is greater in companies with higher comparability than in companies with lower comparability. The findings revealed that earnings quality has a positive impact on trade credit. Moreover, the results suggested that an increase in accounting information comparability intensifies the effect of earnings quality on trade credit. This paper has repercussions for policymakers, investors, and business organizations. Importantly, our study reveals how higher levels of earnings quality lead to better trade credit practices.

The balancing act continues: Recommendations for reform of the National Credit Act 34 of 2005

Through the enactment of the National Credit Act 34 of 2005 (‘NCA’), the government has focused on the protection of consumers with regard to credit agreements. Legislative protection is necessary due to the parties’ unequal bargaining power at the agreement’s conclusion. Despite these endeavours, there is still the common occurrence of a breach of the agreement by consumers and the ensuing recovery process by credit providers. The equitable balancing of the rights and responsibilities of the parties is essential to the well-being of the parties, the credit industry and the economy. The pre-enforcement procedure is at the centre of the tug of war between the parties. Section 129 of the NCA encapsulates the pre-enforcement procedure and thus determines the balancing of the parties’ rights and responsibilities through its interpretation and application. The section falls short in a number of areas and has resulted in disputes, interpretations and two subsequent amendment acts. This article critically analyses section 129 and determines if the rights of both parties have been equally protected, with reference to the burden of bringing the section 129 notice to the consumer’s attention, based on two schools of thought. The article then contributes to the balanced interpretation of the section by way of amendment recommendations.

Cultural aspects of the use of trade credit

Purpose: This paper aims to (1) provide insight into the cultural issues of the use of trade credit, focusing on the links between trade credit and trust, religion, and national culture, and (2) suggest potential directions for future research in this area. Design/methodology/approach: A literature review was conducted to identify the key cultural issues addressed in previous studies on trade credit and to summarize the research on the use of trade credit in three focus areas: trust, religion, and national culture. Findings: A literature review confirms that cultural factors, such as trust, religion, and national culture, play crucial roles in the provision and receipt of trade credit. Therefore, future research on trade credit should adopt a more comprehensive approach that extends beyond a purely financial perspective. Research limitations/implications: This review does not address all potential cultural factors that may impact the use of trade credit. In addition, the review is constrained by the limited research conducted in this area and the heterogeneity of the studies analyzed. Practical implications: Given the significance of trade credit in business operations, a thorough understanding of its cultural underpinnings can prove vital for the parties involved in a trade credit agreement. Originality/value: Despite the crucial importance of trade credit for companies and the extensive research devoted to it, the cultural dimension of its use remains an underexplored field. This article addresses this issue by providing an overview of the current state of research on trade credit concerning three cultural aspects: trust, religion, and national culture. Furthermore, the article outlines several potential directions for future research in the subject of the study. The article’s subject matter falls within the expanding domain of culture and finance. Keywords: trade credit, trust, religion, national culture, ethics. Category of the paper: Literature review.