Local Credit Market Research Articles

Fast payment, credit and bank diversification: the impact of Pix adoption on the local credit market structure

PurposeIn this article, the research objective is to empirically investigate the effect of the adoption of the Brazilian instant payment system, Pix, on the local credit market structure and the diversification of the banking system in Brazilian municipalities.Design/methodology/approachBy analyzing the data, in this study, we compile and align data from supervisory and public sources, covering the period from 2019 to 2022 in Brazil. As of 2014, Brazil was comprised of 5568 municipalities distributed across five regions: North (450 municipalities), Northeast (1792), Midwest (467), Southeast (1668) and South (1191), according to the Brazilian Institute of Geography and Statistics (IBGE). Our analysis relies on the volume and quantity of Pix to the outstanding credit operations in Brazil.FindingsThis article provides evidence that the widespread adoption of Pix has impacted the financial structure of municipalities. This analysis of banking concentration in the country and municipalities, based on banking relationships, helped us assess whether the adoption of Pix had any correlation with the increase in credit lines. Overall, the results from the statistical tables suggest that the adoption of Pix may be having a positive impact on the local credit market structure.Originality/valueThe originality contribution of the study is to initiate an investigation into the impact of this instant payment system, Pix, on the Brazilian reality. Pix was launched in 2020, amid the COVID-19 pandemic, and had significant numbers, such as over 61% of the adult population having at least one Pix key registered in a little over a year; about 100 million people made at least one payment with Pix; and more than 1.4 billion transactions per month, with 72% between individuals, as presented by the REB 2021.

Access to credit and economic complexity: Evidence from Italian provinces

AbstractThis paper focuses on the relationship between “urbanization economies” and access to bank credit by assessing the role of product variety and economic complexity in affecting local credit market conditions. Using quarterly data on Italian provinces for 2008–2018 and adopting a dynamic (spatial) econometric approach, the work provides robust evidence highlighting how local economic complexity reduces the barriers to accessing local credit markets. With a greater “qualified” diversification (higher economic complexity), banks access successful projects with greater probability and are more willing to grant credit. The estimation results also reveal the existence of long‐run spatial spillover effects. The empirical findings advocate for a nuanced and context‐specific policy framework. By embracing place‐based and mission‐oriented policies encouraging diversification and knowledge diffusion, regions can enhance their economic resilience and provide tailored support to businesses, ensuring their stability and growth even in the face of challenging credit conditions.

Leverage and SMEs financial stability: the role of banking competition

This work exploits a large panel dataset on Italian manufacturing SMEs to examine the relationship between leverage and firms’ financial stability. Specifically, we evaluate whether and to what extent this link is affected by the degree of competition characterising the local credit market in which firms operate. Using two measures of local banking competition – the H-statistic and the Boone indicator – our evidence indicates that the negative impact of leverage on firms’ financial health is greater for firms operating in more competitive banking markets. A plausible interpretation of this finding is that the competition drawbacks could prevail on its expected advantages, leading banks to be less inclined to establish lending relationships with risky firms, thus exacerbating their financial vulnerability.

Local Government Finance, Private Resources, and Local Credit Markets in Asia

Local Government Finance, Private Resources, and Local Credit Markets in Asia

Who received interest-free loans during the COVID-19 pandemic?

During the COVID-19 pandemic, the Chinese government implemented a series of policies to encourage banks to provide interest-free loans (IFLs) to small businesses. Using a unique dataset, we find that firms with closer relationships with their banks are more likely to obtain IFLs, particularly in areas with greater banking competition. Our results suggest that banks engage in this behavior to gain a competitive advantage in the local credit market.

Information asymmetry, external certification, and the cost of bank debt

This paper examines how the cost of bank debt reflects public information about borrower quality, and whether such information complements or substitutes the private information of banks. Using a sample of small business loans, and the award of a competitive public subsidy as an observable positive signal of external certification, we find that certification is associated with a lower cost of debt for subsidy recipients if the amount of private information of the lender is limited or the local credit market is less competitive. Public information loses importance once the bank accumulates information over the course of the lending relationship or the credit market is more competitive. Our results highlight a positive effect of external certification, driven by the signal it provides to both the lending bank and its competitors, and suggest that public and private information can be substitutes in the pricing of bank debt.

Forecastıng a city’s socıo-economıc development on the example of Ivano-Frankivsk

The article proposes an algorithm for assessing and forecasting a city's socio-economic development, evaluating its level on the basis of a selected system of indicators on the example of Ivano-Frankivsk, and outlines the main directions its socio-economic development. Despite the significant amount of research in this area, the complexity and scale of current problems, and the need for territorial development of Ukraine justify the need for methodological tools to determine the level of change and the main directions of socio-economic development. To study changes in the socio-economic development of cities, it is recommended to use the method of integrated assessment, as this approach provides information on the overall dynamics of their development, taking into account a wide range of indicators that determine favorable and inhibitory trends. Regarding the forecasting of further changes on the basis of various dependencies, the ranking of models by the approximation coefficient and by the deviation of the calculated integrated indicator and its predicted value should be applied. This approach to forecasting makes it possible to identify the trend of future changes in the model of approximation, which determines the reliability and accuracy of such forecasting. The assessment of socio-economic development on the example of Ivano-Frankivsk showed a low level of changes in the city's development and their further reduction while maintaining the current situation for the period 2018-2020. The article also outlines the main directions of increasing the city's development by restoring and increasing industrial production, introducing innovative technologies, and increasing product competitiveness by attracting investment, creating new jobs, upgrading, reconstructing and modernizing fixed assets, increasing production capacity and increasing business efficiency by expanding the market, increasing exports, promoting the introduction of advanced energy and resource-saving technologies, and the use of alternative energy sources. Greater efforts are also needed from cities to attract financial resources through grants and programs and to involve local people in addressing socio-economic and environmental issues, which will improve their well-being and quality of life. Funding for development programs can be expanded through loans from local governments. Despite the transfer of executive power to local governments and the expansion of their fiscal autonomy, most problems still remain. Therefore, in order to revive the local credit market, it is first necessary to ensure the stability of the political and economic situation in the country and to implement a number of institutional and structural reforms.

Прогнозування соціально-економічного розвитку міста на прикладі Івано-Франківська

development, evaluating its level on the basis of a selected system of indicators on the example of Ivano-Frankivsk, and outlines the main directions its socio-economic development. Despite the significant amount of research in this area, the complexity and scale of current problems, and the need for territorial development of Ukraine justify the need for methodological tools to determine the level of change and the main directions of socio-economic development. To study changes in the socio-economic development of cities, it is recommended to use the method of integrated assessment, as this approach provides information on the overall dynamics of their development, taking into account a wide range of indicators that determine favorable and inhibitory trends. Regarding the forecasting of further changes on the basis of various dependencies, the ranking of models by the approximation coefficient and by the deviation of the calculated integrated indicator and its predicted value should be applied. This approach to forecasting makes it possible to identify the trend of future changes in the model of approximation, which determines the reliability and accuracy of such forecasting. The assessment of socio-economic development on the example of Ivano-Frankivsk showed a low level of changes in the city's development and their further reduction while maintaining the current situation for the period 2018-2020. The article also outlines the main directions of increasing the city's development by restoring and increasing industrial production, introducing innovative technologies, and increasing product competitiveness by attracting investment, creating new jobs, upgrading, reconstructing and modernizing fixed assets, increasing production capacity and increasing business efficiency by expanding the market, increasing exports, promoting the introduction of advanced energy and resource-saving technologies, and the use of alternative energy sources. Greater efforts are also needed from cities to attract financial resources through grants and programs and to involve local people in addressing socio-economic and environmental issues, which will improve their well-being and quality of life. Funding for development programs can be expanded through loans from local governments. Despite the transfer of executive power to local governments and the expansion of their fiscal autonomy, most problems still remain. Therefore, in order to revive the local credit market, it is first necessary to ensure the stability of the political and economic situation in the country and to implement a number of institutional and structural reforms.

Deposit-Lending Synergies: Evidence from Chinese Students at U.S. Universities

AbstractThis paper exploits an influx of Chinese students to U.S. universities from 2000 through 2018 to study synergies between banks’ deposit-taking and lending activities. Banks that are more recognizable by Chinese students experience higher deposit inflows and increase their local credit supply. This credit supply expansion only occurs in information-sensitive credit markets: small business loans and second lien mortgages. Such increase concentrates in nontradable sectors and is more pronounced at locations where managers have more autonomy. The results indicate that deposits from local consumers convey private information about the local credit market, which helps banks in information-sensitive lending.

Frequency vs. Size of Bank Fines in Local Credit Markets

We examine how banking supervisors affect credit at the local level by charging fines to individual banks. Using a macro approach to capture the direct effect on the fined bank and the indirect effect on the other banks operating in the local credit market, we estimate reputational, reallocation and balance sheet effects on Italian provinces over the period 2005–2016 by a fixed effects model and instrumental variables. Provincial gross bank loans expand after a fine independently of its size. The impact of fine frequency depends on the size of the provincial banking sector, but neither on bank governance/ownership nor crises. No statistically significant evidence supports reputational or balance sheet effects. Instead, our results suggest that it would behoove bank supervisors to favor frequency over size of bank fines. Bank fines seem to work more like a good housekeeping seal of approval, enhancing transparency and effective banking practices.

USING EXPONENTIAL SMOOTHING METHOD IN FORECASTING DOMESTIC CREDIT TO PRIVATE SECTOR OF GHANA

The private sector of Ghana faces many problems with respect to raising capital for their operations; this is largely due to government relying heavily on the local credit market for funds for developmental projects. This study uses exponential smoothing method (ESM) in EViews to build a single sample model to forecast future domestic credit to private sector (DCPS) values in Ghana. Secondary annual data on DCPS spanning the period from 1982 to 2016 is used. The findings show that an exponential smoothing model with multiplicative error, additive trend and no seasonality fits the data best. The model had very small residual measures, which demonstrates a good model for forecasting. The estimated model is used to forecast the DCPS values for Ghana from the year 2017 to 2020. The results of this study will help private business people plan for the future. The results will also help policy makers to make informed decisions and formulate policies to improve the DCPS figures, since the private sector is the engine of growth, and crowding out would not be in the best interest of the government and the nation as a whole.

Funding Shocks and Competition in the Mortgage Market

How do primary and secondary mortgage markets interact? This paper shows that funding shocks to mortgage originators interact with the degree of local credit market competition to increase lending growth. Specifically, I use a shift-share approach to estimate the causal effect of the growth in private-label securitization related funding. This effect is stronger in more competitive mortgage markets; with less-regulated non-bank lenders being most responsive to this competition channel. The results emphasize the interaction between the two layers of the mortgage market and document how credit market structure can amplify, or dampen, shocks to the economy.

The Practice of Rotating Saving and Credit Associations and Interest Rate Liberalization—A Case Study of Wenzhou

Rotating Saving and Credit Associations (ROSCA) is an important informal financial institution in developing economies. This article investigates the practice of ROSCA in Wenzhou as a case to explore how the interest rate is determined in a local credit market. We find that interest rates may vary across different purposes of credit demand (e.g., investment, insurance, or durable good consumption). The difference in credit demand may also drive participants to create alternative ROSCA and its implied interest rates are different accordingly. The case of ROSCA and its relationship with the local credit market may shed light on the financial market development and liberalization of interest rates during economic transition.

Online Financial Inclusion and Its Implications for Borrowers: Evidence From Peer-to-Peer Lending

This paper investigates the extent to which the structure of the local credit market, in terms of the presence and lending capacity of traditional banks, shapes the growth and local outreach of peer-to-peer lending. Our study reveals that areas that are financially undeserved by the traditional banking system experience higher growth of peer-to-peer lending. The growth of peer-to-peer lending is more pronounced in areas with lower presence of small banks. Furthermore, we show that the local growth of peer-to-peer lending is associated with lower risk of borrower default. Our findings show that online marketplaces benefit borrowers through improving their credit scores.

Local Bank Competition, Credit Markets and House Prices.

This paper examines how a new lender affects local mortgage and housing markets around its branches. Specifically, I demonstrate the impact on mortgage supply, house prices and repossessions. I use the decision of the European Commission to force the UK’s largest retail bank to divest a part of its business as a shock that generates a new entrant but does not add any resources to the economy. The results show that incumbent banks increase mortgage lending in areas where the new bank has its branches which has a strong impact on real estate markets. House prices, average transaction numbers and mortgage repossession rates all increase in places that receive a branch of the new bank. The effect on prices occurs through the discount rate as rents are not affected.

Local manufacturing productivity markers: an empirical study of the Italian counties

We analyse productivity differentials across about 63,000 manufacturing firms located in 103 Italian counties, in order to shed light on the relation between the business environment and firm performance. We find that a limited set of local variables related to institutional quality, local credit development, market access and innovation environment significantly contribute to explaining manufacturing productivity differentials in Italy. Our empirical findings confirm that firm competitiveness reacts to the local business environment on a multidimensional scale. This suggests that better targeted regional policies at the national and EU level, including measures for fostering convergence or decentralizing wage negotiations, should take into account the interdependence between productivity and the economic environment.

Bank Ownership Structure, SME Lending and Local Credit Markets

Published as Do local banking market structures matter for SME financing and performance? New evidence from an emerging economy in Journal of Banking and Finance, 79, June 2017: 142-158

The determinants of firm–bank relationships in Italy: bank ownership type, diversification and multiple banking relationships

This paper investigates the main features of the relationships between banks and non-financial firms in Italy. Based on detailed firm-level data, we analyse the role of firm-level characteristics, decision-making factors and local credit market indicators in shaping various aspects of corporate banking choices. Empirical results show that young and small firms have a higher probability of relationships with local banks, confirming the advantage of local credit institutions in dealing with informationally opaque firms. Large and internationally active firms tend to establish relationships with national and foreign banks, as they are able to provide more complex banking services that are crucial to access foreign markets. Moreover, firms that are more dependent on external financing are more likely to use multiple and differentiated banking relationships, as a way to diversify external financing sources and alleviate credit constraints.

Macroeconomic Risk Factors and the Role of Mispriced Credit in the Returns from International Real Estate Securities

We examine the canonical influence of global market, currency and inflation risks on the returns from international real estate securities. In addition, we study how mispricing of credit in the local banking systems is related to the returns from these securities. We analyze a global sample of real estate securities over the period 1999 to 2011 to test our hypotheses. We find support for the anticipated relationships between macroeconomic risk factors and the returns from international real estate securities. Our evidence also supports the expected link between local credit market conditions and the performance of international real estate securities.

Trust, Norms of Cooperation, and the Rural Credit Market in Eighteenth-Century France

An examination of the loans recorded by the notary in the seigneurie of Delle during the eighteenth century sheds light on alterations to the mechanisms of trust. In early modern France, the traditional local credit market was based on strong norms of cooperation and reciprocity, in which trust was taken for granted. Changes in the nature of investors and investments during the eighteenth century, however, disturbed this fragile social equilibrium, causing trust to migrate in several new directions.