Higher Credit Risk Research Articles

Mining Semantic Soft Factors for Credit Risk Evaluation in Peer-to-Peer Lending

ABSTRACTWhile Peer-to-Peer (P2P) lending is rapidly growing, it is also accompanied by high credit risk due to information asymmetry. Besides conventional hard information, soft information also enters into the lending decision process. The descriptive loan texts submitted by borrowers have great potential for exploiting useful soft factors, but also pose great challenges due to the semantic sensitivity to context and the complexity of content representation. We propose a novel text mining method for automatically extracting semantic soft factors from descriptive loan texts. The method maps terms to an embedding space, assembles semantically related terms together into semantic cliques, and then defines semantic soft factors corresponding to the semantic cliques. Empirical evaluation shows that the extracted semantic soft factors contributed to significant improvement on credit risk evaluation in terms of both discrimination performance and granting performance. This work advances our knowledge of soft information indicative of a borrower’s credit risk.

Credit Analysis Basics

Capital markets facilitate the appropriate exchange of money. For lenders and borrowers, the interest rate is the primary pricing mechanism that markets use in this exchange. For borrowers deemed to have higher credit risk, lenders add a risk premium to the interest rate to compensate for higher risk. Credit risk is the risk that the borrower will default on (not pay) the payments agreed upon in the loan. Such risk-based interest rates ensure that money flows appropriately between lenders and borrowers.Credit analysis is the process of determining a potential borrower's credit risk. This note explores credit analysis and its relation to the credit-risk premium in interest rates. Excerpt UVA-F-1898 Mar. 9, 2020 Credit Analysis Basics Capital markets facilitate the appropriate exchange of money. For lenders and borrowers, the interest rate is the primary pricing mechanism that markets use in this exchange. For borrowers deemed to have higher credit risk, lenders add a risk premium to the interest rate to compensate for higher risk. Credit risk is the risk that the borrower will default on (not pay) the payments agreed upon in the loan. Such risk-based interest rates ensure that money flows appropriately between lenders and borrowers. Credit analysis is the process of determining a potential borrower's credit risk. This note explores credit analysis and its relation to the credit-risk premium in interest rates. . . .

Banking Supervision, Monetary Policy and Risk-Taking: Big Data Evidence from 15 Credit Registers

We analyse the effects of national versus supranational banking supervision on bank risk-taking, and its interactions with monetary policy. For identification, we exploit: (i) a new, proprietary dataset based on 15 European credit registers; (ii) the institutional change in European banking supervision; (iii) high-frequency monetary policy surprises; (iv) cross-country difference within and outside the euro area. First, supranational supervision reduces credit supply to firms with high credit risk, but strengthens credit supply to firms without loan delinquencies, especially for banks operating in stressed countries. Results are driven by two mechanisms: the country’s institutional quality where banks operate, and bank-level systemic importance. Second, there are important complementarities between monetary policy and supervision: centralised supervision offsets high credit risk-taking induced by accommodative monetary policy, but not credit supply to more productive firms. Overall, we show that using multiple credit registers – first time in the literature – is crucial for external validity.

The impact of ECB loan valuation metrics on third-party loan pricing: A EU firm perspective

This paper delves into the implications for the bank behaviour about firm loan pricing conditions of the new direction undertaken by supervisory and regulatory authorities in the aftermath of the deterioration of the loan portfolio quality that hit EU banks. The 2014 AQR exercise embraces the new direction and extensively uses debt service coverage measures to assess a firm’s loan quality. We, therefore, check whether the DSCR has influenced debt pricing conditions by analysing a panel of 655 listed EU firms from 2009 to 2017. Our findings show that Z-score is unable to discriminate between high and low credit risk firms. The DSCR becomes significant only after 2014, highlighting the incremented importance of this ratio in the bank’s loan pricing determination. Our work contributes to the literature investigating third-party interdependencies with the interplay between lender-borrower relationship and loan pricing and further extends the literature on creditworthiness metrics beyond their mere default-prediction ability (Beaver, 1966; Houghton & Woodliff, 1987). Our results highlight the relevance of the DSCR in the bank’s loan pricing determination and inform firm managers about the drivers that influence the cost of debt thereby enhancing their operational and financial planning.

Financing modes, risk, efficiency and profitability in Islamic banks: Modeling for the GCC countries

The aim of this research is to develop a conceptual model that includes variables related to financing modes, risk-taking, efficiency, and Islamic bank profitability in GCC Countries. The results indicate that the total effect of financing modes on banks’ profitability is high and statistically significant. The results show that a higher- level of participation in Mudharabah and Musharakah financing will generate high credit risk. Murabahah financing increases, directly and indirectly, the profitability and improve simultaneously the capitalization ratio and the cost efficiency for Islamic banks in the GCC countries. The contribution of our research is on two levels. On the one hand, our study is an addition to the literature that examined the determinants of Islamic banks performance. The conceptual model added risk-taking and cost efficiency as intervening variables in the profit-financing modes relationship. On the other hand, this research uses path analysis method, called second-generation approach, to test the model.

Credit Risk in a Volatile Environment: A Case of Zimbabwe Commercial Banks

This research study the credit risk in a volatile environment: a case of Zimbabwe commercial banks was undertaken because non-performing loans within Zimbabwean commercial banks have been increasing for the past 3 years. This research study was guided by objectives such as 1) to analyze the effect of credit risk in a volatile environment on banks in Zimbabwe, 2) to identify challenges in credit risk management that arise from the volatile marketing environment in Zimbabwe and 3) to determine measures that can be taken to mitigate against high credit risk in a volatile environment in Zimbabwe. The research study adopted positivism research philosophy and quantitative research strategy. The research study used a population of 800 employees and managers of commercial banks such as FBC, CBZ Bank, ZB bank, Nedbank, Steward, Nmb, First, Capital Bank, Standard Chartered bank, Stanbic, BankAbc, Metbank and Ecobank. To obtain a figure of 800 as a target population of this research study, the researcher visited the human resources department of every mentioned bank and asked for the number of employees and managers who are at the organization’s head office. In the research study the researcher used a sample size of 260. To determine the sample size of 260 employees, the researcher adopted Raosoft online sample size calculator. It was the finding of this research study that poor business viability and attainment of low net income and cash from operations is the major effect of credit risk in a volatile environment on banks in Zimbabwe. It was also established that credit risk has a strong negative relationship with bank performance, measured as the return of bank index and bank stocks, that is banks such as FBC bank, CBZ Bank, ZB bank, Nedbank, Steward, Nmb, First Capital Bank, Standard Chartered bank, Stanbic, BankAbc, Metbank and Ecobank. Credit risk is the most influential risk exposure on the bank profitability for the Zimbabwean banking sector but it changes at the bank level, that is some banks may effected by changes in interest rate. It was also established that credit risk also has significant negative effect on return volatility. Therefore less credit risk means high profit with less volatility for banks, in other words, less credit risk means stronger and stable growth for banks. It was established that banks face challenges such as inefficient data management. It was established that credit risk management solutions require the ability to securely store, categorize and search data based on a variety of criteria. Any database needs to be updated in real time to avoid potentially outdated information, as well as be keyword optimized to ensure easy location of information. The study established that having the Board which articulates credit risk management policies, procedures, aggregate risk limits, review mechanisms and reporting and auditing systems can act as a measure that can be taken to mitigate against high credit risk in a volatile environment in Zimbabwe. In reality, a bank can only adjust for risks through a variety of conventional mechanisms and strategies, but still there are no certainties. Hence, risk managers are constantly obliged to consolidate reliable risk profiles and refined mitigating processes suiting every rate of change within the environment. The other challenge is of understanding the potential risks associated with new credit products in a given business line which is heightened when firms attempt to see how those risks intersect with the risks from its other business lines. The study further recommend that the management of banks should adopt a strategic risk management so that their employees will view credit risk in a more positive manner. Banks in Zimbabwe should adopt a strategic approach to credit risk activities. This is possible when banks in Zimbabwe creates a risk department that creates and implements strategic risk plans. Strategic risk means adopting a risk policy and reporting all credit risk practices in the media. This arrangement would assist banks in Zimbabwe to generate more information on credit risk global practices and to clearly understand the meaning attached to credit risk by other partners in business.

Credit Risk and Anomalies in Pakistan’s Stock Market

AbstractThis paper investigates the relation between credit risk and stock return for publicly traded firms in the Pakistan Stock Exchange (PSX) over the period 2000–2017. Using credit ratings as a proxy for credit risk, we find that the credit risk–stock return relation is negative in Pakistan, as low‐rated stocks (i.e., those with high credit risk) earn lower returns than high‐rated stocks (i.e., those with low credit risk). This negative relation is robust to alternative measures of credit risk (e.g., Altman’s Z‐score and the distance‐to‐default) and is also maintained even after controlling for size, momentum, and liquidity effects. Our study provides evidence of the default‐risk anomaly in a frontier market that lacks adequate information infrastructure and faces high levels of political and economic uncertainty.

Prospects of Developing Market of Consumer Lending In Russia

Currently, development of the consumer market is becoming increasingly important. Loans provided by a commercial Bank contribute to solving financial problems of the population, as well as enables customers to meet their needs for the goods and services they need, without having a sufficient monetary means at the present moment. The growth of consumer activity activates the production processes, thereby increasing the market capacity, which contributes to developing the economy and, consequently, to improving human wellbeing. The issues related to the consumer credit market development affect not only the problems of the state of the banking system monetary mechanism as a whole, but also the mechanism of lending in a separate commercial bank. At the same time, the consumer lending is usually associated with high credit risks for the credit organization, which determines the topicality of the problems and the need to improve the consumer lending market in Russia.

The Effect of Concentration to SME Lending on Financial Soundness and Profitability in Korean Savings Banks

본 연구는 최근 위험대출인 중소기업대출의 비중을 늘리고 있는 국내 저축은행의 대출집중화 현상에 주목하였다. 특히, 최근 저축은행의 재무건전성과 수익성이 악화되는 상황이 중소기업 대출집중화 경향과 연관될 수 있다는 가정하에 실증연구를 진행하였다. 본 연구를 토대로 확인한 주요 결과는 다음의 4가지로 요약된다. 첫째, 중소기업대출 집중화는 국내 저축은행의 재무건전성 악화를 초래한다. 해당 연구결과는 선행연구인 Simpasa, Pla(2016)의 연구결과와 부합된다. 둘째, 중소기업대출 집중화는 저축은행 수익성을 제고시키지 못했다. 이러한 연구결과는 Tabak, Fazio, Cajeiro(2011)의 주장과 상이하다. 셋째, 영업수익대비 영업비용 증가는 저축은행 건전성과 수익성에 부정적 영향을 끼쳤다. 아울러, 수익성은 자산규모, 대손충당금 적립비율과 각각 부(-)의 관련성을 보였다. 넷째, 대출이자율과 부도율의 상승은 저축은행 건전성과 수익성의 악화를 가져왔다. 결론적으로 자산증가를 통한 저축은행 중소기업대출 집중의 심화는 재무건전성 측면에서 부정적 결과를 가져오고 있으며, 수익성 제고측면에서도 별다른 도움이 되지 못한다고 판단된다.This study did pay attention to concentration to small and medium sized enterprise (SME) lending which has high credit risk recently driven by Korean savings banks. Especially, it assumes that there may be relationship between concentration to SME lending and deteriorating financial soundness & profitability of savings banks, and empirical test is attempted. Main findings are summarized as following four things. First, concentration to SME lending leads to deteriorating financial soundness, and it is line with the previous result of Simpasa, Pla (2016). Second, concentration to SME lending did not enhance the profitability in Korean savings banks, and the evidence does not support to the argument of Tabak, Fazio, Cajeiro (2011). Third, the increase on the ratio of operating cost to operating revenue affects negatively the financial soundness and the profitability of savings banks. Besides, the profitability is negatively related with asset size and coverage ratio to non performing loan. Fourth, climbing lending rate and default rate results in deterioration of financial soundness and profitability in savings banks. As a result, intensification of concentration to SME lending through increasing asset size is producing bad outcome in

Borrowing costs and the role of multilateral development banks: Evidence from cross-border syndicated bank lending

Cross-border bank lending is a growing source of external finance in emerging and developing countries and could play a key role in infrastructure and development financing. This paper looks at the role of multilateral development banks (MDBs) on the terms of syndicated loans, focusing on loan pricing. The results show that MDBs’ participation is associated with higher borrowing costs and longer maturities—signaling a greater willingness by MDBs to finance risky projects which may not be financed by the private sector. We also show that MDBs are more likely to lend to borrowers located in countries with high credit and financial risk. Overall, our findings suggest that MDBs could play a role in easing access to credit for high risk borrowers.

Judicial Intervention in Financial Supervision and Its Power Boundary: Take the Standard of Financial Loan Interest Rate as an Example

The boundary between court intervention and financial supervision should be reasonable. On interest rate regulation, there was a balanced power allocation between judiciary and administration. On the one hand, the People’s Bank of China （PBC） was authorized by the Law on PBC to independently implement interest rate policies on financial loans. Due to the fact that interest rate control conflicts with market mechanism, the PBC initiated interest rate marketization reform on RMB financial loans and completely removed rate ceilings and floors. It turned its role from ex ante control to ex post regulation, including interest rate monitor, special inspection, and administrative penalty. On the other hand, the Supreme People’s Court of China （SPC） has historically acquired jurisdiction on the interest rate of informal loans. It made the four-time interest rate rule” and ceiling of 24% rule”, and restricted its authority to informal loans. As the policy changes, however, the judiciary expanded its jurisdiction to the interest rate of financial loans. This power expansion is embodied in two ways: abstract rulemaking and case-based adjustment. Regarding abstract rulemaking, the SPC issued unified requirements to limit financial interest rates by judicial documents such as the Several Opinions on Further Strengthening Financial Adjudication, which unfavorably impacts the power allocation between judiciary and administration. The formal financial market with high compliance does not require uniform rate control because interest rate liberalization is beneficial for reflecting real credit costs and optimizing resource allocation. If a money-borrower has a high credit risk, the lender would require a high rate to cover this risk, which is not necessarily unreasonable. It is problematic for the judiciary to adopt a one-size-fits-all” strategy to uniformly restrict financial rates, as the judicial control lacks formal rationality, substantive rationality or explicit delegation. The abstract rule-making of SPC violates the principle of judicial deference” and should be rectified. For case-based interest rate intervention, local courts may adjust financial rates according to discretion in adjudication. Empirical study in this article finds that court intervention on financial interest rates is not consistent. Whether the court steps to intervene is influenced jointly by several factors, including loan type （personal or business loan）, purpose （for consuming or commercial use）, amount, and maturity. In case-based interventions, the court may refer to the interest rate rules on informal loans, apply the principle of fairness, exert adjustment of overdue rates, or implement the policy of financial consumer protection or other public policies. The tendency of intervention should be corrected when the intervention lacks reasoning and causes confusion. Judicial intervention in financial loan interest rates should be limited to case adjustment under the framework of legal dogmatics. Intervention should be exercised exceptionally rather than routinely. In order to achieve a higher level of rule of law, specific rules should be applied preferably to abstract principles, while public policies should be converted to practical rules before application.

Network Based Scoring Models to Improve Credit Risk Management in Peer to Peer Lending Platforms.

Financial intermediation has changed extensively over the course of the last two decades. One of the most significant change has been the emergence of FinTech. In the context of credit services, fintech peer to peer lenders have introduced many opportunities, among which improved speed, better customer experience, and reduced costs. However, peer-to-peer lending platforms lead to higher risks, among which higher credit risk: not owned by the lenders, and systemic risks: due to the high interconnectedness among borrowers generated by the platform. This calls for new and more accurate credit risk models to protect consumers and preserve financial stability. In this paper we propose to enhance credit risk accuracy of peer-to-peer platforms by leveraging topological information embedded into similarity networks, derived from borrowers' financial information. Topological coefficients describing borrowers' importance and community structures are employed as additional explanatory variables, leading to an improved predictive performance of credit scoring models.

Credit Risk and Anomalies in Pakistan’s Stock Market

This paper investigates the relation between credit risk and stock return for publicly traded firms in the Pakistan Stock Exchange (PSX) over the period 2000-2017. Using credit ratings as a proxy for credit risk, we find that this relation is negative in Pakistan, as low-rated stocks (i.e., those with high credit risk) earn lower returns than high-rated stocks (i.e., those with low credit risk) do. An additional analysis using Altman’s Z-score as a proxy for credit risk confirms the negative relation between credit risk and stock return. In seeking to determine whether this negative relation arises from other anomalies, we discover that stock return is positively related to firm size in Pakistan, so a reverse size effect is present. However, the negative credit risk-return relation in Pakistan persists after controlling for the reverse size effect as well as the momentum and liquidity effects. This study provides evidence that the default-risk anomaly holds in a frontier stock market that lacks adequate information infrastructures and faces high levels of political and economic uncertainty.

Do Islamic banks need to earn extra profits?

PurposeThis paper aims to draw upon existing debate over “financial sector rent” (bank rent) to analyze the current pattern of financing of Bangladeshi and Indonesian Islamic banks during the period of 2011 and 2015.Design/methodology/approachThe empirical evidence through a comparative approach of analyzing the performance of Islamic banks with that of conventional banks in respective countries – two of the largest countries where majority of the population are Muslims – is drawn to demonstrate the objective.FindingsWhile Islamic banks in Bangladesh are primarily concentrating on the murabaha (mark-up contract) mode of financing, some transactions under musharaka (partnership/equity-based contract) are observed in the Indonesian Islamic banking sector. This anomaly in Indonesia can be explained by the nature of their musharaka financing which is not of the purely “participatory” financing type. As a result, we can observe the quasi-murabaha syndrome in Indonesian Islamic banking sector. The concentration of asset-based financing including consumers’ financing (hire purchase) in the credit portfolio gives Islamic banks relatively higher Islamic bank rent opportunity for protecting their “franchise value” as Sharīʿah-compliant (Islamic law-compliant) lenders. However, Indonesian Islamic banks share a still infant Islamic banking market, and enjoy less rent opportunity under a severe competition with conventional banks.Research limitations/implicationsThe bank rent approach suggests that the syndrome observed both in Bangladesh and Indonesia can be ironically justifiable. Moreover, the mode of profit-and-loss sharing provides, in practice, an idea of the difficulty in managing the participatory financing embedded with high credit risk. Under this scenario, it is necessary for Islamic scholars and the regulatory authority to design an appropriate financial architecture, enabling Islamic banks to avail the benefit from a wider variety of Sharīʿah-based Islamic financing.Originality/valueThis paper expands the newly emerged concept of “Islamic bank rent” to make sense of the murabaha syndrome in Bangladesh and the quasi-murabaha syndrome in Indonesia. This approach also contributes to clarifying the unique risk and cost to be compensated with the spreads that Islamic banks are expected to earn.

Analysis on the perceived occurrence of challenges delaying the delivery of water infrastructure assets in South Africa

PurposeMinimal private participation for infrastructure development continues to affect developing economies like South Africa. This study aims to determine the perceived occurrence of challenges delaying the delivery of water infrastructure assets and the role of both public and private financing for infrastructure development.Design/methodology/approachQuantitative approach was used, and questionnaires were administered to stakeholders that have participated in delivering water infrastructure assets in South Africa. Of the 96 returned questionnaires, 91 were usable, representing 61 per cent response rate. Data from the survey were analysed using descriptive and exploratory factor analyses. The reliability test represented a value of 0.945, indicating internal consistency.FindingsData analysis revealed that corruption, hostility, weak project structuring, high fiscal deficits by state government, cost recovery constraints, high credit risk for private financing and unreliable planning and procurement processes are major challenges delaying the delivery of water infrastructure assets. More so, municipal government remains the key custodian of water infrastructure delivery with limited support from private capital as a result of political administrative instability, legislation and policy uncertainty and inadequate risk-adjusted returns.Originality/valueEmphasis should be made on eradicating corruption and non-transparent financial management to improve municipal creditworthiness and amending and implementing much improved legislation and foreign inclusion. Additionally, financial models to complement the existing mechanisms of financing water infrastructure projects should be sought and used. Complete eradication of infrastructure challenges envisages to reduce fiscal deficits, improve service delivery and enhance the competitiveness and productivity of the economy.

Risk Taking and Low Longer-Term Interest Rates: Evidence from the U.S. Syndicated Loan Market

We use supervisory data to investigate risk taking in the U.S. syndicated loan market at a time when longer-term interest rates are exceptionally low, and we study the ex-ante credit risk of loans acquired by different types of lenders, including banks and shadow banks. We find that insurance companies, pension funds, and, in particular, structured-finance vehicles take higher credit risk when investors expect interest rates to remain low. Banks originate riskier loans that they tend to divest shortly after origination, thus appearing to accommodate other lenders' investment choices. These results are consistent with a search for yield by certain types of shadow banks and, to the extent that Federal Reserve policies affected longer-term rates, the results are also consistent with the presence of a risk-taking channel of monetary policy. Finally, we find that longer-term interest rates have only a modest effect on loan spreads.

Monetary Policy Uncertainty, Credit Risk and China's Macroeconomic Fluctuations

This paper examines the effects of monetary policy uncertainty (MPU) on China's banks' credit risks and China's macroeconomic fluctuations. By incorporating the stochastic volatility into the quantity-based monetary policy rule, we provide a specific measure for China's MPU through Bayesian MCMC method. The bank-level evidences show that an increase of China's MPU could bring about the rise of non-performing loan ratio and thus exacerbate banks' credit risks. The historical decompositions from the Bayesian SVAR model reveal that the dramatic increase of China's MPU after 2008 financial crisis brought about -0.75% output growth rate loss in 2009 Q1. And our nonlinear VAR model shows that the negative impacts of MPU on economic activities are much stronger and more persistent when the economy enters the high credit risk regime.Simulations from the nonlinear DSGE model featuring credit risk and uncertainty shock confirm that banks' credit risks might be potential transmission channel through which China's monetary policy uncertainty shock affect its real economy.

The Information Externality of Corporate Financial Information in the Secondary State-Bond Market

This study provides evidence on the role of public firms’ financial reports in the state-bond secondary market. I investigate the informational role of corporate earnings announcements and find that public firms’ monthly earnings signals aggregated to the state level are positively associated with contemporaneous state-bond returns. Further analyses reveal that public firms’ earnings announcements predict traditional economic indicators and contain incremental information that is independent of the traditional economic indicators. In cross-sectional analyses, I show that the earnings-returns relation is especially pronounced when bondholders face longer investment horizons and higher credit risks. Taken together, the evidence indicates a positive externality of corporate financial reports in alleviating the opacity in the municipal bond secondary market.

Comparative Analysis of Credit Risk of Islamic and Conventional Banks: (A Case Study of Pakistan)

The article discusses the components distressing the credit risk faced by banking institutions and systematically recognizes key factors affecting credit risk formation in Islamic banking operations in Pakistan. Moreover, this study compares these factors in Islamic and conventional banking. Islamic banking institutions are equally susceptible to all types of risk specifically the credit risk, likewise in conventional banking. In the continuation of this study we gather the Data of conventional and Islamic Banks from their Audited financial report, further we applied different statistical tools to check out the relation between dependent and Independent variables. We found out that Islamic Bank has higher credit risk than conventional banks due to its shariah binding although conventional banks have less credit risk than Islamic Banks.

Credit Cycles, Securitization, and Credit Default Swaps

We present a limits-to-arbitrage model to study the impact of securitization, leverage and credit risk protection on the cyclicity of bank credit. In a stable bank credit situation, no cycles of credit expansion or contraction appear. Unlevered securitization together with mis-pricing of securitized assets increases lending cyclicality, favoring credit booms and busts. Leverage changes the state of affairs with respect to the simple securitization. First, the volume of real activity and banking profits increases. Second, banks sell securities when markets decline. This selling puts further pressure on falling prices. The mis-pricing of credit risk protection or securitized assets influences the real economy. Trading in these contracts reduces the amount of funding available to entrepreneurs, particularly to high-credit-risk borrowers. This trading decreases the liquidity of the securitized assets, and especially those based on investments with high credit risk.