High-quality Borrowers Research Articles

How does credit information sharing shape bank loans?

This paper analyzes the influence of credit information sharing on how banks set the terms of bank loans and the ownership of the loans. Using a sample of 23,341 bank loans in 44 countries during the period 2005–2019 we examine how interest rates, collateral, maturity, amounts, and ownership of bank loans are influenced by the degree of penetration of credit bureaus and public credit registries. The results show that credit information sharing decreases interest rate spread for high-quality borrowers and decreases loan maturity. Moreover, the amount of credit is negatively affected by the degree of coverage by registries. Finally, we find evidence in line with credit information sharing increasing loan ownership concentration.

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.

Fintech Lending and Credit Market Competition

AbstractThis article studies how the rise of financial technology (Fintech) lending affects credit access, interest rates, and social welfare. We consider a lending competition model with two incumbent banks and a Fintech lender, which use different information and technologies to assess borrower creditworthiness. We show that Fintech lending could negatively affect high-quality borrowers’ access to credit when the Fintech lender’s screening accuracy is superior to that of the banks. Furthermore, Fintech lending may worsen the allocative efficiency of credit and reduce social welfare under some conditions. Analytical and numerical results suggest that Fintech lending mostly reduces the expected interest rates.

The Impact of Two-Sided Market Platforms on Participants’ Trading Strategies: An Evolutionary Game Analysis

With the development of internet technology, more two-sided market platforms, e.g., Tabao, Amazon and Lending Club, have emerged, and it is worth exploring the role that these two-sided market platforms can play in better serving users. This paper explores the impacts of platforms on participants’ trading strategies in the two-sided market, taking the online loan market as an example. Based on the management strategies of online lending platforms, we divided them into two categories: active online lending platforms and inactive online lending platforms. Evolutionary game theory and numerical simulation were employed to investigate the influences of these two types of platforms on the trading strategies of lenders and borrowers. We found that active and appropriate management measures taken by active online lending platforms can steer lenders and borrowers towards adopting win-win trading strategies, thus attracting more high-quality borrowers and corresponding investors. These results imply that a platform with two-sided market characteristics plays a crucial role in coordinating and guiding participants on both sides, and active management measures adopted by the platform can promote the benign operation of the two-sided market.

Do Lenders Value a Corporate Sustainability Structure?—Evidence from the Cost of Bank Loans

In response to pressures placed on a firm by its stakeholders, managers may initiate various corporate sustainability activities. In such cases, they need to make decisions not only about the level of sustainability commitment, but also about the way to structure it. There are numerous ways to structure corporate sustainability activities with different financial consequences. In this paper, we investigate the separate and joint effects of the corporate sustainability level and the corporate sustainability structure on a firm’s bank borrowing cost. We test our predictions by conducting multivariate regression analysis on a sample of 1417 US bank loan facilities over the period 2006–2011. We find evidence that high-quality borrowers with a high level or diversified structure of sustainability activities benefit from lower loan interest rates. Also, our analysis of the joint effects shows that only high-quality borrowers with a high level and diversified sustainability activities enjoy lower bank loan costs. Overall, these results reveal that lenders value how firms structure their sustainability activities. Therefore, they have important implications for managers and bankers.

Dynamic Trade Finance in the Presence of Information Frictions and FinTech

Problem definition: The paper focuses on an innovative bank-intermediated trade finance contract, which we call dynamic trade finance (DTF, under which banks dynamically adjust loan interest rates as an order passes through different steps in the trade process). We examine the value of DTF, the impact of process uncertainties, and the associated information frictions on this value and the strategic interaction between DTF and FinTech. Academic/practical relevance: As more than 30% of global trade involves bank-intermediated trade finance, examining contract innovation in trade finance (DTF) and its strategic interaction with FinTech is of practical importance. Also, analyzing trade finance in the presence of process dynamics and information frictions complements the existing academic literature. Methodology: We construct a parsimonious model of a supply chain process consisting of two steps. The duration of each step is uncertain, and the process may fail at either step. Information delay may also occur when verifying the process passing a step. The seller borrows from a bank to finance this two-step process either through uniform financing (the interest rate remains constant throughout the process) or DTF (the interest rates are adjusted according to a precommitted schedule as the process passes each step). When lending, the bank faces a regulatory capital requirement (the bank is required to hold capital reserve when issuing risky loans) or information asymmetry (the seller/borrower possesses more accurate information about the trade process than the bank). Results: The value of DTF lies in its ability to reduce transactional deadweight loss (under the regulatory capital requirement) and screening (separate high-quality borrowers from the low-quality ones under information asymmetry). This value is greater for more reliable or lengthier trade processes, yet DTF’s ability to screen is stronger when the process is less reliable. The severity of information delay hurts the value of DTF convexly. FinTech that expedites information transmission and verification and enables automatic execution complements DTF, and those that segment customers more efficiently could substitute DTF. Managerial implications: Our results shed light on how the underlying trade process dynamics and the type of information frictions involved affect the optimal deployment of contract innovations (DTF) and FinTech in trade finance.

How voluntary information sharing systems form: Evidence from a U.S. commercial credit bureau

We use the introduction of a U.S. commercial credit bureau to study when lenders adopt voluntary information sharing technology and the resulting consequences for competition and credit access. Our results suggest that lenders trade off access to new markets against heightened competition for their own borrowers. Lenders that initially do not adopt lose borrowers to competitors that do, which ultimately compels them to adopt and leads to the formation of an information sharing system. Access to credit improves but only for high-quality borrowers in markets with greater lender adoption. We provide the first direct evidence on when financial intermediaries adopt information sharing technologies and how sharing systems form and evolve.

The crowding-out effect of formal finance on the P2P lending market: An explanation for the failure of China's P2P lending industry

Using the credit records of the borrowers from a peer-to-peer (P2P) lending platform in China, this paper finds that P2P borrowers from cities with broader coverage of formal finance are more likely to default. Moreover, as formal finance develops, high-quality borrowers become less likely to turn to P2P lending, which suggests that formal finance exerts a crowding-out effect on the P2P lending market. This paper provides an explanation for the failure of China's P2P lending industry, implying that Fintech intended to promote financial coverage, if not reducing information asymmetry, does not necessarily lead to desirable economic and social outcomes.

Small and medium-sized enterprises that borrow from "alternative" lenders in the United Kingdom: who are they?

Access to credit for small and medium-sized enterprises (SMEs) is an important condition of successful economic growth. Lending to SMEs is no longer restricted to banks: many new players (or alternative lenders) are entering the credit market. However, the research has not identified what kind of SMEs choose these alternative lenders. Are they just a random sample from the overall population of SMEs or are they different in some specific respects? Is their credit quality better or worse? This study provides a general overview of the external financing landscape for the UK SMEs and an exploratory analysis of the SME portfolio of one of the alternative lenders in the United Kingdom. The results indicate that clients of the alternative peer-to-peer lender are younger and have more debt, but they also have higher returns than a generic sample of UK SMEs. Their probability of default, as estimated by the SME Z-score, is lower. We conclude that the alternative markets for SME lending may be heterogeneous in terms of risk. At least some alternative lenders have a sound risk level and are attractive to high-quality borrowers. Therefore, they act as a substitute for traditional lending.

SMEs debt financing in the EU: on the eve of the coronacrisis

SMEs are the main drivers of economic development. As the debt crisis and coronavirus crisis show, despite their importance, they are extremely sensitive to economic downturns. Therefore, SMEs need to be supported through various tools. The paper is aimed at evaluating the SMEs’ bank and governmental support in the northern and southern EU countries in two crisis periods and assessing the financial state of SMEs on the eve of coronacrisis using micro-level data. It was proved that bank loans and credit lines remain the main sources of SMEs’ financing. After the debt crisis, banks are becoming more loyal to SMEs.It was proved that SMEs from the northern EU countries suffered less from the previous crisis and therefore started their recovery earlier than the southern ones in terms of profitability, liquidity and debt burden. In addition, it was shown that both groups on the eve of the new turbulence period were in better financial state compared to the previous debt crisis. The southern EU countries suffered more from both crises. At the same time, due to effective governmental support and bank loyalty, their SMEs entered the coronacrisis at the same level of financial stability as the northern ones. Since the new support measures are concentrated primarily in the banking sector through loan guarantee schemes and reduced interest rates, it is essential to provide debt financing to high-quality borrowers and avoid the debt crisis in southern counties.

Does formal financial development crowd in informal financing? Evidence from Chinese private enterprises

The relationship between formal and informal finance is uncertain. They serve as substitute for high-quality borrowers but are complement for low-quality borrowers. As formal financial institutions expand, they may concentrate on high-quality borrowers or diversify among borrowers of different qualities. Using unique survey data from Chinese private firms, we are allowed to investigate the relationship for a group of borrowers who were considered as low-quality. We find that formal financial development imposes a crowd-in effect for private firms’ informal financing, especially in East China. There is heterogeneity between East and West China. We document that the crowd-in effect is greater for private firms with bank access or of large size.

How Voluntary Information Sharing Systems Form: Evidence from a U.S. Commercial Credit Bureau

We use the introduction of a U.S. commercial credit bureau to study when lenders adopt voluntary information sharing technology and the resulting consequences for competition and credit access. Our results suggest that lenders trade off access to new markets against heightened competition for their own borrowers. Lenders that initially do not adopt lose borrowers to competitors that do, which ultimately compels them to adopt and leads to the formation of an information sharing system. Access to credit improves but only for high-quality borrowers in markets with greater lender adoption. We provide the first direct evidence on when financial intermediaries adopt information sharing technologies and how sharing systems form and evolve.

Examining the spillover effect of sustainable consumption on microloan repayment: A big data-based research

Social value-oriented consumers perform more sustainable consumption than conventional consumers do because consumers’ choices reflect their latent social values on environmental protection. However, whether sustainable consumption prompts more social value-oriented behaviors outside the consumption domain remains uncertain. The increased availability of consumer-level big data presents an opportunity to investigate consumers’ cross-domain behavior subsequent to sustainable consumption, which broadens the comprehension of sustainable consumption by going beyond the boundary of consumption behavior. Supported by a joint dataset comprising information on both consumers’ consumption behavior and their microloan repayment behavior, this study examines the effects of sustainable consumption on consumers’ subsequent debt default behavior to empirically test the cross-domain spillover effects of sustainable consumption behavior. The results suggest that the default probability of green consumers overall was 4.34 % lower than that of nongreen consumers, even though this positive effect on repayment disappears when sustainable consumption is for health reasons. The findings contribute to research on sustainable consumption by providing empirical evidence indicating that sustainable consumption has positive spillover effects in other domains. The results also provide an alternative perspective for identifying high-quality borrowers for microloan platforms.

The Decline of Secured Debt

The share of secured debt issued (as a fraction of total corporate debt) declined steadily in the United States over the twentieth century. This stems partly from financial development giving creditors greater confidence that high quality borrowers will respect their claims even if creditors do not obtain security up front. Consequently, such borrowers prefer retaining financial flexibility by not giving security up front. Instead, security is given contingently – when a firm approaches distress. This also explains why superimposed on the secular decline, the share of secured debt issued is countercyclical.

Repurchase Options in the Market for Lemons

We study repurchase options (repo contracts) in a competitive asset market with asymmetric information. Gains from trade emerge from a liquidity need, but private information about asset quality prevents the full realization of trade. We obtain a unique equilibrium, which features a pooling repo contract and full participation among borrowers. The equilibrium repo contract resolves adverse selection: the embedded repurchase option prevents the market unraveling that occurs in asset-sale markets. However, the contract is inefficient due to cream skimming. Competition to attract high-quality borrowers through the terms of the repurchase option inefficiently lowers liquidity. The equilibrium contract has a closed form and is portable to many applications.

Information contents of collateral under heterogeneous borrower qualities on the bank loans market in China

We analyze the risk of default and provision of collateral for bank loans made to firms of varied credit qualities using a unique dataset obtained from a major state-owned commercial bank in China. Both high and low quality borrowers provide collateral more often than medium quality debtors do. Using models that explicitly incorporate heterogeneous borrower qualities, we find a positive relation between collateralization and risk of default for loans issued to debtors with low credit ratings. In contrast, collateral provided by debtors with high credit ratings is negatively associated with the risk of default. These results suggest that low quality borrowers may be required to provide collateral at the bank's request to mitigate moral hazard problem. On the other hand, high quality borrowers may provide collateral willingly to signal quality in order to mitigate adverse selection problem when competing for getting access to bank loans. Our findings shed new lights on different information contents of collateral on the bank loans market of China, and have important implications for banks in screening, contracting and monitoring the risk of commercial loans for clients with diverse credit qualities.

Half-full or Half-empty? Financial Institutions, CDS Use, and Corporate Credit Risk

We construct a novel U.S. data set that matches bank holding company credit default swap (CDS) positions to detailed U.S. credit registry data containing both loan and corporate bond holdings to study the effects of banks' CDS use on corporate credit quality. Banks may use CDS to mitigate agency frictions and not renegotiate loans with solvent but illiquid borrowers resulting in poorer measures of credit risk. Alternatively, banks may lay off the credit risk of high quality borrowers through the CDS market to comply with risk-based capital requirements, which does not impact corporate credit risk. We find new evidence that corporate default probabilities and downgrade likelihoods, if anything, are slightly lower when banks purchase CDS against their borrowers. The results are consistent with banks using CDS to efficiently lay off credit risk rather than inefficiently liquidate firms.

Recovery Dynamics: An Explanation from Bank Lending and Entrepreneur Entry

This paper offers a dynamic theory of bank lending standards with two features. First, bank screening takes time. Second, the borrower pool is determined endogenously by firm entry. I show that in booms, banks reduce standards by offering unscreened credit to any borrower, which results in many low-quality firms entering the pool. In busts, high-quality borrowers delay borrowing if the average quality of the pool is sufficiently low. If so, banks increase standards by offering credit only after screening. With that expectation, only high-quality firms enter the pool. The implied investment fluctuations can be related to macroeconomic recoveries.

Information Sharing and Rating Manipulation

We show that banks manipulate borrowers’ credit ratings before sharing them with competing banks. Using a unique feature on the timing of information disclosure of a public credit registry, we disentangle the effect of manipulation from learning of credit ratings. We show that banks downgrade high-quality borrowers for which they have positive private information to protect their informational rents. Banks also upgrade low-quality borrowers with multiple lenders to avoid creditor runs. Our results suggest that credit ratings manipulation limits the positive effects of credit registries’ information disclosure on credit allocation.Received April 18, 2016; editorial decision April 1, 2017 by Editor Philip Strahan.

Information Sharing and Rating Manipulation

We show that banks manipulate the credit ratings of their borrowers before being compelled to share them with competing banks. Using a unique feature on the timing of information disclosure of the Argentinean public credit registry, we disentangle the effect of manipulation from learning of credit ratings. We show that banks downgrade high quality borrowers on which they have positive private information to protect their informational rents. Banks also upgrade low quality borrowers to avoid creditor runs. Our results can explain the limited effectiveness of public credit registries and cast doubt on the use of credit ratings in reducing information asymmetry.