Bank Lending Policies Research Articles

Did the Subprime Crisis Contribute to Difference/s in Lending Policies of the Banks between the Pre-Crisis Period and the Post-Crisis Period in Belgium?

As is well known, the 2007-2008 banking crisis began in mid-2007 with revelations of losses on US subprime real estate mortgages and reached an acute phase following the failure of Lehman Brothers on September 15, 2008 which resulted in the drying up of bank funding markets and sharp drops in banks’ equity prices. Belgian banks were not immune to these events, which culminated in Belgian government intervention in three of the four largest banks: Fortis, Dexia, and KBC. The examination of the 2008 crisis highlights a number of unique aspects of this crisis in relation to previous banking crises. Some of the novel features of the 2008 crisis e.g., the contagion generated by the global scale of institutions’ holdings of complex financial instruments with exposures to one country reflect a structural evolution of banking and financial markets. This suggests that globalization of activity and complexity of transactions may well play a role in future banking crises.

Bank Lending Policy in Brazil

This paper aims at revisiting the empirical evidence on the bank lending channel of monetary transmission in Brazil. We analyse banks’ balance sheet monthly data for the period from December 1994 to December 2001. For industrialized countries, the monetary policy instrument usually considered in empirical studies is a short-term interest rate under the central bank control. This is also the indicator used by Graminho and Bonomo (2002). We argue that the short-term interest rate only partially captures the monetary stance in Brazil. When we consider a broader indicator of monetary policy that encompass all the required reserves on different types of bank deposits (demand, savings, and time deposits), we argue that there is evidence for a transmission mechanism working through bank lending. The bank lending channel is a particular case of the broad credit channel due to its emphasis on just one source of external financing (namely, the supply of bank loans) in the monetary policy transmission. Most of the early empirical research on the bank lending channel made use of aggregate time-series data.

Impact of the Sub-Prime Crisis on the Lending Policies of Banks in South Africa

Impact of the Sub-Prime Crisis on the Lending Policies of Banks in South Africa

Effect of the Sub-Prime Crisis on the Lending Policies of Banks in Singapore

Effect of the Sub-Prime Crisis on the Lending Policies of Banks in Singapore

Credit-scoring and bank lending policy in consumer loans

The objective of this paper is to estimate a credit-scoring model for the consumer loans during the period 2007–2009. A probit model per year is estimated to examine, whether the probability of granting a loan changes through years. Moreover through a bivariate probit model, we analysed how the borrower’s characteristics influence the decision of granting consumer loans and their performance. Eventually, we demonstrated that the financial institutions’ lending policies are compatible with default risk minimisation and thus it is important for banks to review the borrowers’ creditworthiness periodically, in order to minimise default risk.

Niska zależność od kredytu w polskich firmach – błogosławieństwo w okresie kryzysu finansowego?

The article explores the extraordinary resilience of the Polish economy to the implications of the global financial crisis despite Poland’s strong integration with other economies. The authors hypothesize that one of the key reasons for this resilience is a low reliance on credit among Polish firms and their low use of financial leverage. To validate their hypothesis, the authors use both macroeconomic data (reflecting the role of credit in company balance sheets) and data from surveys carried out annually on a representative sample of companies by Poland’s Central Statistical Office (GUS) and the country’s central bank, the National Bank of Poland (NBP). The research shows that many firms decide against using credit at all if possible. Interestingly, the authors say, not only companies with a poor financial standing and those whose loan applications have been turned down follow this policy. Generally, Polish companies have been doing relatively well financially in recent years, the authors note, so their limited use of leverage is the result of a conscious choice rather than necessity, especially in the case of companies in relatively good shape. This is in line with the “pecking order” theory under which companies tend to obtain financing from sources that are readily available and then steadily move on to sources that may be more difficult to utilize. This means that a company is likely to make use of its internal resources first. Such a model of financing results in the relative resistance of Polish firms to any periodic tightening in bank lending policies and, consequently, in their greater resilience to the financial crisis, Boguszewski and Lissowska say.

Clawbacks and Cronyism: Evidence from China

This paper is the first to examine the long‐term impact on bank lending policy of clawbacks in executive compensation contracts. Using a hand‐gathered database of Chinese business lending, we find evidence of reduced cronyism at the Big Four Chinese banks during the period after the introduction of a clawback program, marking a shift from earlier studies covering earlier time periods that find evidence of widespread cronyism at the Big Four banks. Politically connected borrowers received fewer and smaller loans relative to non‐Big Four banks, consistent with a backlash against cronyism at the Big Four banks. In contrast, we find that cronyism persisted (i.e., politically connected borrowers received more and larger loans) at non‐Big Four Chinese banks where the clawback policy was not effective.

Did Structured Credit Fuel the LBO Boom?

ABSTRACTThe leveraged buyout (LBO) boom of 2004 to 2007 was fueled by growth in collateralized debt obligations (CDOs) and other forms of securitization. Banks active in structured credit underwriting lent more for LBOs, indicating that bank lending policies linked LBO and CDO markets. LBO loans originated by large CDO underwriters were associated with lower spreads, weaker covenants, and greater use of bank debt in deal financing. Loans financed through structured credit markets did not lead to worse LBOs, overpayment, or riskier deal structures. Securitization markets altered banks' access to capital, affected their lending policies, and fueled the recent LBO boom.

The Financial Situation of Polish Enterprises 1992-93 and Its Impact on Monetary and Fiscal Policies

This is the first detailed study of enterprise finances in a country of Central and Eastern Europe during transition. It is based on enterprise data collected monthly by the Polish Central Statistical Office. Its primary purpose is to provide answers to questions about the size of enterprise debt, particularly bad debt, to banks, other enterprises, and the government; about its distributions by sector of activity and type of ownership; and about its evolution over time. The central findings are, firstly, that the bad debt is a large proportion of total debt, both to banks and enterprises, and, secondly, that it is highly concentrated. The study identifies enterprises, in terms of sales (and possibly employment) representing about a tenth of the whole enterprise sector, whose debt in relation to the total income of these enterprises is particularly large. In terms of financial situation and the softness of the budget constraint, these enterprises have been (and are) distinctly different than most other enterprises, forming effectively a 'black hole' of the economy. The Polish enterprise sector has thus been found to have, in 1992-3, a heavily pronounced dual structure: about 90% of it is almost debt-free while about 10% of it has accumulated large debts to banks, the government and other enterprises. The paper also discusses the implications of these findings for the conduct of fiscal and monetary policies of the central authorities and for the lending policy of commercial banks.

Did Structured Credit Fuel the LBO Boom?

The leveraged buyout (LBO) boom of 2004-2007 was fueled by growth in collaterialized debt obligations (CDOs) and other forms of securitization. Banks that were active in structured credit underwriting lent more for LBOs, indicating that bank lending policies linked the LBO and CDO markets. LBO loans originated by large CDO underwriters were associated with lower spreads, weaker covenants, and greater use of bank debt in deal financing. Loans financed through the structured credit market did not lead to worse LBO deals, overpayment, or riskier deal structures. Our findings suggest that securitization markets altered banks’ access to capital and affected their lending policies and offer an explanation for the recent LBO boom.

Paying back to borrow more: Reputation and bank credit access in early America

The birth of commercial banking in New England after the American Revolution provides an important case to examine banking development under asymmetric information. Similar to credit markets in developing countries today, bank borrowers of early America usually had little or no collateral. This paper uses a unique data set based on loans between 1803 and 1833 for Plymouth Bank to examine bank lending policies in the absence of collateral. Empirical evidence suggests that borrowers with little collateral established their credit-worthiness through repeated interaction with banks.

Bank Consolidation and Lending Policies to Small Business: Differences Across Geographical Areas

Using Bank of Italy data on Italian banks in the period 1990-2004, the paper analyses the short and long-run effects of the concentration of the banking industry on the availability of credit to small and medium-sized firms. Our study employs a bank-based approach and investigates the differential effects of banking consolidation in the various geographical areas, in order to capture the influence of the different economic contexts. Our research also considers the different groups of intermediaries involved, as well as the role of new entry banks and of those not involved in consolidations (e.g. rivals). We find that banks' specialization in terms of credit policy seems to be affected by MA this effect is stronger in the South and in the North East of Italy. On the other hand, in the case of acquisitions, banking groups improve their expertise in small business lending. These results hold in all the main geographical areas, except for the southern regions, where - everything being equal - small firms are riskier and banks' takeovers are motivated mainly by the need to allow financial restructuring. However, in this market, the entry of new banks and close relationships between local banks and agglomerations of small firms partly offset the lower specialization on small business financing induced by acquisitions.

The new Capital Accord and banks’ lending decisions

Capital requirements (‘pillar one’ of the new Capital Accord) rising with the increase in borrowers’ PDs were thought as being likely: (i) to have a serious impact on the financing of small and medium-sized enterprises (usually riskier than large corporates) and (ii) to increase the procyclicality of the supply of credit. The aim of this paper is to provide an empirical evaluation of the possible impact of the new Accord proposals on the lending policies of Italian banks. We compare the interest rate charged to a large set of Italian firms with the cost brought about by the change in the calculation of capital requirements. Since the two variables move together in response to an increase in borrowers’ PDs, we conclude that the new regulatory approach to measuring capital adequacy appears consistent with banks’ own risk evaluations. This result is supported by a ‘stress testing’ exercise: the relationship also holds in a distressed economic scenario, which replicates the financial conditions of the Italian corporate sector in the 1993–1994 recession.

Bank Lending Policy, Credit Scoring, and the Survival of Loans

To evaluate loan applicants, banks increasingly use credit scoring models. The objective of such models typically is to minimize default rates or the number of incorrectly classified loans. Thereby they fail to take into account that loans are multiperiod contracts, for which reason it is important for banks not only to know if but also when a loan will default. In this paper a bivariate tobit model with a variable censoring threshold and sample selection effects is estimated for (1) the decision to provide a loan or not and (2) the survival time of granted loans. The model proves to be an effective tool to separate applicants with short and with long survival times. The bank's loan provision process is shown to be inefficient: loans are granted in a way that conflicts with both default risk minimization and survival time maximization. There is thus no trade-off between higher default risk and higher return in the lending policy.

Bank Lending Policy, Credit Scoring and the Survival of Loans

To evaluate loan applicants, banks increasingly use credit scoring models. The objective of such models typically is to minimize default rates or the number of incorrectly classified loans. Thereby they fail to take into account that loans are multiperiod contracts for which reason it is important for banks not only to know if but also when a loan will default. In this paper a bivariate Tobit model with a variable censoring threshold and sample selection effects is estimated for (1) the decision to provide a loan or not and (2) the survival of granted loans. The model proves to be an effective tool to separate applicants with short survival times from those with long survivals. The bank's loan provision process is shown to be inefficient: loans are granted in a way that conflicts with both default risk minimization and survival time maximization. There is thus no trade-off between higher default risk and higher return in the lending policy.

Housing Prices, Bank Lending, and Monetary Policy

In order to gain more insight into the relationship between housing prices and mortgage lending, we estimate models for both the Dutch housing and the mortgage market. The empirical analysis presented in this paper offers support for the hypothesis that in the Netherlands housing prices and mortgage lending are interdependent. According to our model, housing prices were influenced by changes in bank lending criteria during the estimation period, even when we control for variables such as disposable household income, mortgage interest rate, demographic developments and the housing stock. Mortgage lending was found to be dependent on housing prices as well as disposable income. Our analysis further suggests that in the short run housing prices can deviate substantially from their long-run equilibrium value.

Why Firm Access to the Bond Market Differs Over the Business Cycle: A Theory and Some Evidence

This paper presents a theory of firm access to the bond market in which information gathering agencies provide a valuable service but alter the relative cost of this funding source across firms of different creditworthiness and over the business cycle. The theory builds on two assumptions. First, the of the signal produced by the information agencies that firms use to access this market varies with firms' creditworthiness. Second, the mix of bond applicants in recessions is riskier than in expansions. According to this paper's theory, rating agencies affect the cost to access the bond market and recessions increase the impact that these agencies have on the cost of this funding source. Importantly, the impact of recessions is not uniform across firms. It may, for instance, be largest for mid-credit quality firms. The analysis of the bonds issued in the last two decades by American nonfinancial firms produces evidence in support of the model's key assumption. I find that rating agencies are more likely to produce split ratings at issue date, my proxy for the of the signal produced by information agencies, on bonds of mid-credit quality issuers. The analysis of bond-credit spreads at issue date, in turn, shows that split ratings do not affect the relative cost of bond financing across firms in expansions, but they do increase the relative cost of this funding source for mid-credit quality issuers in recessions. Furthermore, this analysis shows that split ratings make bond financing more expensive for these mid-credit quality issuers in recessions than in expansions. These findings confirm the model's key result that information gathering agencies influence access conditions to the bond market across firms and over the business cycle. They also suggest that recessions alter the substitutability between bank funding and market funding, and that the extent of this effect is largest for mid-credit quality firms. This has several potentially important implications, in connection, for example, with firm choices of funding sources, bank lending policies and the credit channel of monetary policy.

The Role of Corporate Balance Sheets and Bank Lending Policies in a Financial Accelerator Framework

This paper uses the popular Bernanke, Gertler and Gilchrist (BGG) model to explore links between the financial health of the non-financial corporate sector and bank lending behaviour on the one hand, and the effectiveness of monetary policy on the other. We use the model's microeconomic contracting framework to generate specific financial scenarios, defined in terms of steady-state credit spreads, bank lending policies and corporate sector financial health. We embed these scenarios in the macroeconomic BGG model and investigate how they affect dynamic responses of the real economy to monetary and real shocks. Our simulations show that in the context of the BGG model, the balance sheet positions of the financial and non-financial corporate sectors can affect the monetary transmission mechanism. We illustrate that in certain financial scenarios in the model the financial accelerator mechanism is very potent, whereas in others it has little incremental impact. This implies that, for a given shock, monetary policy can be less or more proactive, respectively. In addition, the model simulation results suggest that certain parameters may merit particular attention. For example, the sensitivity of bank lending policy to news about corporate financial health has an especially marked impact in the model's dynamics. And as illustrated in previous work, corporate leverage also plays an important role in amplifying and propagating shocks.

Have unincorporated businesses in the UK been constrained in their ability to obtain bank lending?

The extent to which bank lending policies - and in particular their requirement for firms to post collateral - have imposed constraints on the ability of unincorporated businesses to meet their demand for debt finance has been examined. It was found that for the period from 1982 through to the end of the data sample, variations in the level of bank lending to unincorporated businesses can be explained in terms of a more or less conventional demand function for bank finance - albeit one with a zero interest elasticity - though there is some evidence of the importance of collateral constraints in the shape of a significant positive effect from the growth in the real value of housing wealth. Prior to 1982 there was a sharp increase in the level of bank lending to unincorporated businesses which is much harder to interpret in these terms. Instead, this is seen as having been driven largely by changes in bank lending policies; in particular, by a drive to develop new markets in response to unfavourable conditi...

Bad loans, soft budget constraints and the political economy of financial market reform in transition economies

Financial market imperfections and especially the bad debt problem are among the most important factors impeding economic restructuring in transition economies. This paper analyses the implications of non-performing loans for the lending policy of banks and for the ensuing allocation of credit. It is shown that a lending bias exists in favour of old debtors, which not only impedes structural change but may also counteract policies intended to harden budget constraints and to promote restructuring. The paper also discusses from a political economy perspective, why despite these negative implications financial market reforms were not pursued more forcefully in most countries.