Loan Rates Research Articles

The Impact of Macroeconomic, Social and Governance Factors on the Sustainability and Well-Being of the Economic Environment and the Robustness of the Banking System

The paper highlights the connection between the European Union banking system and a set of representative factors—macroeconomic, social, and governance factors—selected from the perspective of sustainability and well-being. The analysis is carried out as a panel regression on EU member countries with annual data for 2005–2018, and it explores the impact of the selected factors on the robustness of the banking systems in the European Union countries. The analyzed variables to reflect the robustness of the banking system were the domestic credit to the private sector and the nonperforming loans (NPL) rate. Those indicators are of high relevance and concern within the current pandemic context. The results show that the banking development degree influences the increase of private-sector lending and the decrease of the NPL rate. Social and governance factors impact differently the level of private sector and NPL rate. All macroeconomic indicators used to influence the level of private-sector lending. The research reflects the fact that to promote and adopt a culture of sustainability and to ensure well-being, a close collaboration between all sectors of an economy is needed, together with a strong policy interconnection and harmonization between micro and macro.

Interest Rate Swaps: A Comparison of Compounded Daily Versus Discrete Reference Rates

This paper studies the hedging effectiveness of interest rate swaps using different reference rates for eliminating interest rate risk from floating rate loans. Two different reference rates are studied. The first is a reference rate whose maturity, ∆, matches the payment interval of the floating rate loan. The second is a reference rate whose maturity is ∆/N. The prime examples are LIBOR and SOFR, respectively. We show that the ∆-based interest rate swap provides a good static hedge, but the ∆/N-based swap does not. Although dynamic hedging with the ∆-based interest rate swap is possible under some conditions, it both introduces model risk and increases transaction costs, making it a less practical alternative.

Analysis of Funding Strategy, Credit Performance, and Banking Profitability. (Case Study of CIMB-NIAGA Bank in Indonesia)

This study is to analysis funding strategy and credit performance, and its effect on Banking Profitability. The indicator of funding strategy measured with the ratio of time deposits with a total of third-party funds (DTPF) or a third-party fund structure (TPFS), credit performance measured by credit growth (CG) and non-performing loans rate (NPL), while banking profitability with return on assets (ROA).The descriptive and verification methods with the quantitative approach will be used in this research. Secondary data sources are from the quarterly published financial statements of the CIMB Niaga Bank in Indonesia of 2012 – June 2020 period, and multiple regression used for data analysis. The study results found TPFS partially has a negative but not significant effect on ROA. CG partially has a positive but not significant effect on ROA while NPL partially has a negative and significant effect on return on assets. Simultaneously TPFS, CG and NPL have a significant effect on ROA. The ROA is influenced by TPFS, CG, and NPL of 71.2% while the remaining 28.8% is influenced by other factors.

The Effect of Financial Leasing Threshold in the Financial Development and Economic Growth: Evidence from Albania

Purpose: The main aim is to analyze the effect of the financial system in the economic growth and if the loan impact is conditioned or not by the financial leasing threshold. Approach/Methodology/Design: The proceeding data are time series of Albania's macroeconomic indicators, from 2008 to 2020 (quarterly frequency). The dependent variable is Gross Domestic Product, threshold variable is financial leasing, and the independent variables are business and individual loans from the banking system, the rate of private loans to domestic loans, monetary aggregate M2, deposits (with and without term) of the banking system. The statistical approach is based on the generalized method of moments for endogenous and exogenous variables in the threshold model. Findings: There is a financial leasing threshold level in which financial variables of bank loans and domestic loans are related to economic growth by changing the correlation direction. Practical Implications: the article demonstrated the empirical impacts that ought to be taken into consideration by the banking sector and financial leasing institutions to make decisions for further incentives in developing financial leasing. Originality/Value: The research provides empirical results encouraging further investigations on the subject matter.

Heterogeneity in corporate debt structures and the transmission of monetary policy

We study how differences in the aggregate structure of corporate debt affect the transmission of monetary policy in a panel of euro area countries. We find that standard policy tightening shocks raise the cost of loans relative to corporate bonds. In economies with a high share of bond finance, the resultant rise in the overall cost of credit is less pronounced as a smaller portion of corporate debt is remunerated at the loan rate and firms further expand their reliance on bonds. In economies with a low share of bond finance, the rise in the cost of credit is reinforced by a shift in the composition of debt towards bank loans. As a consequence, a higher bond share goes along with a weaker transmission of short-term policy rate shocks to real activity. By contrast, the real effects of monetary policy shocks to longer-term yields strengthen with the share of bond finance in the economy.

An Empirical Bargaining Model with Left-Digit Bias: A Study on Auto Loan Monthly Payments

This paper studies price bargaining when both parties have left-digit bias when processing numbers. The empirical analysis focuses on the auto finance market in the United States, using a large data set of 35 million auto loans. Incorporating left-digit bias in bargaining is motivated by several intriguing observations. The scheduled monthly payments of auto loans bunch at both $9- and $0-ending digits, especially over $100 marks. In addition, $9-ending loans carry a higher interest rate, and $0-ending loans have a lower interest rate. We develop a Nash bargaining model that allows for left-digit bias from both consumers and finance managers of auto dealers. Results suggest that both parties are subject to this basic human bias: the perceived difference between $9- and the next $0-ending payments is larger than $1, especially between $99- and $00-ending payments. The proposed model can explain the phenomena of payments bunching and differential interest rates for loans with different ending digits. We use counterfactuals to show a nuanced impact of left-digit bias, which can both increase and decrease the payments. Overall, bias from both sides leads to a $33 increase in average payment per loan compared with a benchmark case with no bias. This paper was accepted by Matthew Shum, marketing.

Extension-Led Demonstration: Grameen Microfinance Methods and Capital Access for Low-Income Female Entrepreneurs

A nonprofit community development financial institution and Extension collaborated to conduct a demonstration project to evaluate efficacy of Grameen peer-group microfinance methodology in addressing barriers faced by low-income women entrepreneurs in a small metro area. Program performance metrics achieved by 284 culturally diverse, low-income entrepreneurs (almost all women) over 5 years included a program loan repayment rate of 99%, increased average client income, bank savings accumulation, and increased opportunities for improved credit scores. Client survey responses indicated program methods developed confidence and skills in finances, leadership, and teamwork. Extension professionals may play various roles in such endeavors.

The legacy of structural racism: Associations between historic redlining, current mortgage lending, and health.

Structural racism, which is embedded in past and present operations of the U.S. housing market, is a fundamental cause of racial health inequities. We conducted an ecologic study to 1) examine historic redlining in relation to current neighborhood lending discrimination and three key indicators of societal health (mental health, physical health, and infant mortality rate (IMR)) and 2) investigate sustained lending disinvestment as a determinant of current neighborhood health in one of the most hypersegregated metropolitan areas in the United States, Milwaukee, Wisconsin. We calculated weighted historic redlining scores from the proportion of 1930s Home Owners' Loan Corporation residential security grades contained within 2010 census tract boundaries. We combined two lending indicators from 2018 Home Mortgage Disclosure Act data to capture current neighborhood lending discrimination: low lending occurrence and high cost loans (measured via loan rate spread). Using historic redlining score and current lending discrimination, we created a 4-level hierarchical measure of lending trajectory. In Milwaukee neighborhoods, greater historic redlining was associated with current lending discrimination (OR = 1.73, 95%CI: 1.16, 2.58) and increased prevalence of poor physical health (β = 1.34, 95%CI: 0.40, 2.28) and poor mental health (β = 1.26, 95%CI: 0.51, 2.01). Historic redlining was not associated with neighborhood IMR (β = −0.48, 95%CI: −2.12, 1.15). A graded association was observed between lending trajectory and health: neighborhoods with high sustained disinvestment had worse physical and mental health than neighborhoods with high investment (poor physical health: β = 5.33, 95%CI: 3.05, 7.61; poor mental health: β = 4.32, 95%CI: 2.44, 6.20). IMR was highest in ‘disinvested’ neighborhoods (β = 5.87, 95%CI: 0.52, 11.22). Our findings illustrate ongoing legacies of government sponsored historic redlining. Structural racism, as manifested in historic and current forms of lending disinvestment, predicts poor health in Milwaukee's hypersegregated neighborhoods. We endorse equity focused policies that dismantle and repair the ways racism is entrenched in America's social fabric.

The debtor-attributes information and the probability of performing loans in the microfinance sector

Based on the recent evidence of the high rate of non-performing loans in Indonesia’s microfinance sector, there is a need to formulate a mechanism that could control such credit risk. This study attempts to identify the pivotal determinant factorsresponsible for performing loans. In particular, this research proposes demand-side factors, such as debtor-attributes information, as critical for ensuring installment payments. Using unique data from microfinance in Central Java, it employs logistic regression analysis to prove that debtors’ age and type of collateral significantly affect loan performance. This paper further shows that other variables, such as the payment period and the interest rate, also substantially affect credit risk. These findings have empirical and practical significance. For practical purposes, this research develops the new perspective that debtor-specific information, particularly on their behavioral aspects, requires more in-depth review. This insight may be useful for developing new credit-analyzing tools to alleviate severe non-performing loans. Empirically, this research improves the study of antecedent variables that influence performing loans.

Macroeconomic factors that influence the bank loans rate in international and Ukrainian practice

The goal of the paper is to disclose the links between the dynamics of macroeconomic indicators and the level of bank loan rates based on international and Ukrainian practice. On the basis of the previous analysis, the paper also aims to identify the key trends in the formation of loan prices in the long run and identify problematic issues related to bank loan rates. The main characteristics of bank lending rates in Ukraine are: a) their high rates; b) sharp changes in the weighted average bank loan rates from year to year; c) higher loan rates for households compared to the cost of bank loans for businesses; d) higher bank loan rates for short- and medium-term loans versus long-term ones; e) lower rates on loans in foreign currency compared to the loans in hryvnia; and f) high share of non-performing loans to households and businesses in bank portfolios. In the context of world and Ukrainian practice, the paper demonstrates the reverse effect between macroeconomic indicators such as GDP per capita, the ratio of loans to GDP, the ease of doing business index and bank loan rates. The article also demonstrates a direct relationship between the dynamics of inflation rate in the country, the dynamics of non-performing bank loans and their rates.

Borrow low, lend high: Credit arbitrage by sophisticated investors

We document that some investors arbitrage by borrowing and lending at the same time on Renrendai, one of the largest peer-to-peer lending platforms in China. They borrow at an annual interest rate of 7.31% and lend at 12.53% to earn the spread. Compared with non-arbitrageurs, arbitrageurs have larger portfolios and they diversify default risk by lending smaller amounts to many borrowers. Moreover, arbitrageurs are able to identify quality loans with lower risk and higher return, and thereby earn 1.19% higher risk-adjusted return than non-arbitrageurs do. As a result, 706 arbitrageurs earn 1.5 million yuan in 3 years. However, unsuccessful investments Granger cause some arbitrageurs to default, suggesting that arbitrageurs may increase platform risk. After the platform employ big data and reform the loan pricing mechanism from borrower-determined to platform-determined, loan interest rate decreases from 12.49% to 10.15%, and arbitrage phenomenon no longer exists. These findings suggest that arbitrageurs are highly sophisticated investors who make profits by utilizing financial leverage, diversifying credit risk, and identifying quality loans. Meanwhile, regulators should closely monitor arbitrage behaviors and constantly evaluate their consequences.

Bank Competition and Local Labor Markets

While the real effects of bank competition is a classic topic in the finance literature, there has been relatively little research studying the effect it might have on local labor markets. In this paper, I utilize county level data and an exogenous shock to competition supplied by DOJ antitrust policies to look at the relationship between bank competition and local labor markets. Following this negative shock to competition, unemployment increases and wages decrease, but there is no aggregate employment effect. Industries that depend more on bank funding see an increase in employment following a negative shock to competition in the short run, but see a decrease in employment in the longer term. This is due to local banks taking a lower return on their loan portfolio to local businesses in the short run, while raising their loan rates in the long term. Once the type of industries present inside a county is taken into account, an employment effect can be documented in the aggregate. Overall, the evidence suggest that competition has a negative effect on employment outcomes, although there may be positive effects in the short run.

A contingent claim model of life insurer-bank swap default pricing: strategic substitutes and complements

ABSTRACT This paper develops a contingent claim framework to examine swap transactions between a life insurer and a bank that bilaterally price default risks. We show that the insurer (the protection buyer in the swap transaction market) regards the optimal bank loan rate as a strategic complement. In contrast, the bank (the protection seller) considers the optimal insurer guaranteed rate as a strategic substitute. Hedging conducted by the insurer enhances profits but hurts policyholder protection. Bank capital regulation harms policyholder protection. Insurer capital regulation leads to bank risk-taking. Capital regulations, as such, would jeopardize insurer-bank performance from a financial stability standpoint.

Attitudes Towards Advertising of Banking Loans Among Russians

The article presents the results of an empirical study of the features of evaluating advertising of banking products. 99 respondents with a different experience of borrowing behaviour, aged 18 to 66, 37 per cent males, were assessed. The respondents were asked to rate, using the semantic differential methodology, two pictures depicting mortgage advertisements from VTB and Otkritie banks. By comparing the average values of the ratings, we found that advertising for banking products is evaluated more negatively, even if the ideal option is presented. Actual advertising images are rated significantly lower than ideal images — people with real experience of taking loans rate advertising for banking products as more benevolent.

Assessing Effects of Capital Adequacy Ratio Requirements on Loan Demand of Kenya Commercial Bank Eldoret Town

Security of investors' reserve remains the significant worry of bank controllers. It is in this regard the capital sufficiency becomes significant and imperative. Capital adequacy is an origination that results from reworking the banks' current capital structure to rebuild the banking industry against the widespread establishment. This research's objective was to assess the effect of capital adequacy ratio requirements on the Bank of Kenya Commercial Bank's loan demand. The study adopted the Capital Buffer Theory. The study reviewed related literature to capital adequacy ratio requirements on the efficiency in the Bank. This study adopted an exploratory research design. The sample population of interest in this study consisted of all 23-bank employees of KCB, Referral Branch. The study adopted a census survey. The following research questions guided the interview. How effective would be capital adequacy ratio requirements on loan demand of Kenya Commercial Bank? The study used interview guides in the collection of data. Qualitative analysis was used to analyze the perception data collected from the key informants. Joint subjects were determined, and qualitative data, organizing, and discussing based on the main objective were done. These were presented using grouped data collected in the form of discussion. From the interviewed respondents, it was found that there might be significant impacts of capital adequacy ratio requirements on loan demand of KCB. The elasticity of loan rate due to capital adequacy ratio requirement might affect loan demand, implying that there would be a change in loan demand for every percentage change in the loan rate. The study recommends that bank regulators be keen on the banks' capital adequacy ratio by laying down financial regulations on liquidity since financial regulation aims to enable banks to improve liquidity and solvency. Stricter regulation may be suitable for bank stability, but not for bank efficiency; restricting banks may lower bank efficiency and increase the probability of a banking crisis. There is a need for capital supplementation to keep up with Capital Adequacy Ratio (CAR) since stricter capital adequacy, robust supervision, and market discipline power promotes technical efficiency. Keywords: Loan, Demand, Ratio, Capital, Bank DOI: 10.7176/RJFA/12-6-06 Publication date: March 31 st 2021

Loan interest rate Nash models with solvency constraints in the banking sector

ABSTRACT This paper attempts to study loan interest rate Nash game models in the banking sector under regulatory solvency constraints. By taking solvency constraints as Basel I, Basel II, and Expected Shortfall (ES), we obtain results regarding the existence of loan interest rate equilibrium. A sensitivity analysis for solvency models and some numerical results are presented. Numerical results show that the weighted loan interest rate of the Mongolian banking system is consistent with the base case of the theoretical weighted loan interest rate corresponding to the Nash equilibrium.

Regressive Mortgage Credit Redistribution in the Post-Crisis Era

Abstract We document four secular trends about U.S. mortgage origination by traditional and FinTech lenders after the 2008-2009 financial crisis. First, since 2011, the overall number, size, and approval rate of small and medium-sized loans have been decreasing over time, relative to large loans. Second, the largest lenders redistribute their lending the most. Third, this loan-size redistribution of credit increases in the size of the lender. Fourth, the effects are stronger for mortgages further away from the conforming loan limit(s) in both directions. We argue that the supply of credit drives these secular trends, and we assess several potential economic mechanisms.

Does Rural Credit Mediate Vulnerability Under Idiosyncratic and Covariate Shocks? Empirical Evidence from Vietnam Using a Multilevel Model

This study explores the relationship between the uptake of credit and household vulnerability in rural Vietnam in terms of two main vulnerability indicators—vulnerability as expected poverty (VEP) and vulnerability to food poverty (VFP)—using data from the 2012 Vietnam Access to Resources Household Survey. VEP and VFP are examined under two decompositions, idiosyncratic vulnerability and covariate vulnerability, by constructing a multilevel structure model. The analysis accounts for two critical problems (selection bias and endogeneity) through an endogenous switching regression model. Generally, the results indicate the positive impacts of credit uptake on poverty alleviation and VEP reduction. Nevertheless, credit uptake increases VFP. Noticeably, compared to other categories of credit, productive credit is found to be more pronounced in reducing either idiosyncratic or covariate vulnerability. There is also suggestive evidence that although credit has positive effects overall, taking on either formal or semiformal credit has negative impacts on both poverty and vulnerability reduction. Hence, towards formal credit, government policies should concentrate more on credit costs and support preferential loan rates for poor rural households for productive purposes.

The financial impact of cancer on Canadian young adults.

To explore the financial impact of cancer in young adults (YAs) compared to matched non-cancer peers. Five hundred seventy-five YAs from the Young Adults with Cancer in their Prime (YACPRIME) studyreported on out-of-pocket cancer costs and missed work. YA cancer survivors were compared to matched peers without cancer on key financial indices based on current age (< 35 vs. 35 + years) and time since diagnosis (< 5 vs. 5 + years). Descriptive statistics, Chi-square tests, and prevalence ratios (PR) were used to compare groups on financial variables. Almost 60% of YA survivors spent at least $100/month on cancer-related expenses, and 49% missed at least one year of work. YA survivors were more likely to have outstanding credit card ((< 35 (PR = 1.37, p = 0.001); 35 + (PR = 1.33, p = 0.001)) and line of credit (< 35 (PR = 1.42, p = 0.008); 35 + (PR = 1.27, p = 0.016)) balances. Home ownership was higher among non-cancer peers ((< 35: PR = 1.42, p < 0.001); 35 + (PR = 1.69, p < 0.001); < 5 years (PR = 1.39, p < 0.001); 5 + years (PR = 1.41, p = 0.005)). YA survivors were more likely to not own assets ((< 5 years (PR = 2.25, p < 0.001); 5 + years (PR = 2.25, p = 0.004)). Those diagnosed within 5 years had higher rates of payday loans (PR = 3.91, p = 0.021). While exploratory, results suggest that YAs are disadvantaged compared to their peers in type and value of assets owned and debts carried. Survivorship care plans for YA survivors should include resources to manage the financial impacts of cancer.

Credit risk in the microfinance industry: The role of gender affinity

ABSTRACT This study explores the role played by gender in lending transactions and specifically its effects on the loan portfolio credit risk of microfinance institutions (MFIs). Using a multicountry data set of developing countries, where MFIs mainly operate, the analysis shows that a higher proportion of female loan officers increases the loan portfolio at risk. Nonetheless, we also find that this positive relationship is negatively mediated by the gender affinity between female loan officers and female borrowers. Gender affinity suggests that female loan officers are more likely to lend to female borrowers, and this reduces the default rate of loans offered by MFIs.