Local Credit Research Articles

Branching Networks and Geographic Contagion of Commodity Price Shocks

This paper studies the role of banks' branching networks in propagating the oil shocks. Banks that were exposed to the oil shocks through their operations in oil-concentrated counties experienced a liquidity drainage in the form of a declining amount of demand deposit inflow as well as an increasing percentage of troubled loans. Banks were forced to sell liquid assets, and contracted lending to small businesses and mortgage borrowers in counties that were not directly affected by the oil shocks. The effect is magnified when banks do not have strong community ties, but is mitigated if banks' branching network is sufficiently dispersed. I also find the decline in local credit supply cannot be completely offset by healthy competing banks' increased lending, providing fresh evidence from the perspective of bank competition.

Effects of Fiscal Policy on Credit Markets

Credit markets typically freeze in recessions: access to credit declines and the cost of credit increases. A conventional policy response is to rely on monetary tools to saturate financial markets with liquidity. Given limited space for monetary policy in the current economic conditions, we study how fiscal stimulus can influence local credit markets. Using rich geographical variation in U.S. federal government contracts, we document that, in a local economy, interest rates on consumer loans decrease in response to an expansionary government spending shock. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

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.

'Loans for the Little Fellow:' Credit, Crisis, and Recovery in the Great Depression

This paper studies how structural transformation exacerbates financial crises. Using newly collected data, I document the persistent effect of credit supply shocks on local economies during the Great Depression. Cities with access to an unusually generous branching network were no different from other California cities in the 1920s but had significantly smaller recessions and stronger recoveries in the 1930s. Linked worker-level data demonstrate local credit supply shifted workers out of agriculture and into nontradable employment, which was higher-skilled, creating a lingering barrier to convergence.

Determinants of credit demand of farmers in Lam Dong, Vietnam

PurposeThe purpose of this paper is twofold: to explain access to formal and informal credit in agriculture of Vietnam; and to compare the effectiveness between regular econometrics and machine learning techniques.Design/methodology/approachThe multinomial logit (MNL) regression model and the random forest (RF) technique are employed for comparison purposes. To avoid heteroskedasticity, the robust covariance matrix is computed to estimate the sandwich estimator which in turn provides an asymptotic covariance matrix for biased estimators. Additionally, multicollinearity is tested among independent variables with variance inflation factors less than 3. Adequacy approach and sensitivity analysis are used to determine relevant levels of predictors. For models comparison, statistical evaluation metrics including Cohen’sκ, mean absolute error, root mean squared error and relative absolute error are employed.FindingsThe discrepancy between sensitivity analysis and adequacy approach revealed that MNL is more compatible for explaining determinants of credit participation. Due to insignificant differences in the evaluation metrics between models, the winner of choice is undetermined. Among other determinants, collateral, farmsize, income, procedure, literacy and all risk variables stand out to be critical factors when deciding borrowing schemes. While financially literate farmers tend to acquire loans from both sources, borrowing decisions against different risk sources depend on risk type and famers’ own desire to borrow.Originality/valueResults of the MNL model are more consistent with literatures, which reinforce the role of collateral in the local credit scheme. Besides, financial literacy and farmers’ perception on different risk sources also influence how farmers’ borrowing strategies vary among sources.

THE ROLE OF LOCAL CREDIT INSTITUTIONS (LPD) IN DISTRIBUTING AGRICULTURAL CREDIT IN PENATIH VILLAGE, DISTRICT OF EAST DENPASAR, DENPASAR CITY

Local credit institution (LPD) is financial enterprise that owned by the village to carry out business activities in that village and or the villagers. In its development, LPD has a imperative role that is not far from the goal of establishing LPD its sel, viz. Encouraging the development o rural economic throughraising the unds, distribute the loan for the community, create equal opportunities for business activities and employment opportunities for villagers.This study aims to determine characteristics of the agricultural debtor in LPD Desa Adat Penatih, the criteria for amount of agricultural credit distributed in LPD Desa Adat Penatih, the procedure for distributing agricultural credit in LPD Desa Adat Penatih and also the interference in repayment of credit in LPD Desa Adat Penatih. The location of this study were selected purposively. Data used in this study is qualitative data and quantitative data.The result of the study showed that the characteristics of the agricultural debtor in the LPD Desa Adat Penatih are seen from age and gender, the number of family dependents, the level of education, the criteria for amount loan and the business fields. The amount of agricultural credit distributed in LPD Desa Adat Penatih base of the collateral value for collateral provided by debtor. The procedure for distributing agricultural credit in LPD Desa Adat Penatih starts by of the loan application, analysis or assessment of credit, credit decision, disbursement and loan administration. There is no interference to LPD Desa Adat Penatih in repayment of agriculture credit. Both in terms of repayment period and credit collectibility.

Customer satisfaction analysis based on service quality: case of local credit provider in Bali

Lembaga Perkreditan Desa (LPD) or village credit institution is a financial institution that is only exists in Bali. LPDs had been developed to promote the local people economies by providing micro credits as well as to deposit their money. This paper is aimed to study the satisfaction of customers toward LPD’s services. A hundred and fifty customers of LPD Sidakarya that is located at Denpasar were purposive sampling selected as the respondents of the study on July 2017. The data were collected by applying self-organized questionnairé which its items were developed using 7 scale on Likerts’ measurement. The respondents were asked to value their expectation as well as their perception on five dimension of service quality i.e. tangible factor, reliability, responsiveness, assurance, and empathy. The study reveals tangible factor was perceived positively whilest the other determinants need to be improved.

EARNED INCOME TAX CREDITS AND INFANT HEALTH

In 1998, Montgomery County, Maryland adopted a local earned income tax credit (EITC) program. We use U.S. Vital Statistics data covering births in Maryland from 1995 to 2004 to examine whether the local EITC impacted birth weight and the probability of low birth weight in Montgomery County. Using difference-in-differences (DD) and triple differences (DDD) strategies, we find that the Montgomery County EITC decreased the probability of low birth weight by 1.9 to 2.4 percentage points among likely eligible mothers. Using the local credit as a unique opportunity to identify EITC effects within a state, these estimates contribute to a growing body of literature that finds improved birth outcomes for credit recipients.

Sovereign Credit_Rating Disclose and Bond Liquidity under Sovereign Debt Crisis

This study examines the effect of the informational content of local credit rating announcements in emerging markets on the liquidity of their bond markets. We analyze the bond liquidity markets across five countries such as Poland, Greece, Spain, Hungary and Turkey. The sample includes daily data about sovereign bonds over the period ranging from July 2009 to January 2014.We mainly focus on the period before and after the sovereign debt crisis. We note that the bond liquidity is affected due to the sign of the rating granted by the rating agencies for each country.

The Limits of Lending? Banks and Technology Adoption across Russia

AbstractWe exploit historically determined variation in local credit markets to identify the impact of bank lending on innovation across Russian firms. We find that deeper credit markets increase firms’ use of bank credit, their adoption of new products and technologies, and their productivity growth. This relationship is more pronounced in industries farther from the technological frontier, more exposed to import competition, and that export more. These impacts are also stronger for firms near historical R&D centers or railways and in regions with supportive institutions. Consistent with these results, credit markets contribute to economic growth in such regions.Authors have furnished a data set, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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.

How FinTech Enters China’s Credit Market

How does FinTech credit mitigate local credit supply frictions in China's segmented credit market? In our simple theoretical models, we show that FinTech credit (i) expands the extensive margin of credit to borrowers of lower credit scores and (ii) provides relatively more credit to borrowers with lower credit scores. We confirm both predictions based on comprehensive data from one of China's largest FinTech credit providers.

Commercial vs Policy Loans: A Policy Dilemma After Global Financial Crisis

China put forward fundamental reform in the banking sector in the mid-1990s to commercialize the state-owned specialized banks. This reflected the central government’s determination to enhance the efficiency of the state-owned commercial banks (SOCBs) by separating commercial lending from policy lending. Though the banking reform in the mid-1990s could not completely change the credit culture and fully commercialize the SOCBs, the operations of SOCBs and their nonstate counterparts have been more responsive to market signals and discipline. Nonetheless, in order to maintain a stable growth after the 2008 Global Financial Crisis (GFC), the central government initiated a 4-trillion yuan stimulus package which fostered the proliferation of local government financial platforms (LGFPs) and rapid credit expansion through shadow banking. Substantial amount of credits were channeled to projects of low returns and even created sizable excess capacity. Deteriorating credit quality heightens the risks in China’s banking sector. Though central leaders are certainly aware of the risks embedded in the banking sector, the GFC in 2008 and the trade war in 2018 prompted the Chinese government to focus more on macroeconomic stability and thus policy loans at both central and local levels will remain as important levers to stabilize 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.

Strengthening Local Credit Markets Through Lender‐Level Index Insurance

AbstractThis article considers lender‐level index insurance as a means of expanding access to credit in disaster‐prone communities. In this approach, the lender transfers the disaster risk of loans in its portfolio by contracting on an observable measure of the catastrophe. I develop and calibrate a dynamic, stochastic model using data from a community lender in Peru that is vulnerable to El Niño–related flooding. The modeled lender can insure against El Niño using an index‐based product that is available for purchase by financial intermediaries in Peru. I examine how premium rates, basis risk, and background risk may influence the lender's insurance decision and credit supply. Overall, the results suggest that lender‐level index insurance holds promise for reducing disaster‐related credit supply shocks and expanding credit access in vulnerable communities.

Collateralization and distance

Abstract This paper examines how collateralization in small business lending varies with bank-borrower proximity. Our analysis establishes a robust inverse relationship between distance and collateral: Borrowers located in the vicinity of the bank face higher collateral requirements. The estimated relationship is independent of the allocation of decision-making authority within the lending organization, competitive pressure in the local credit markets, or risk rating of the borrower. Our findings seem consistent with the notion that distance reflects transaction costs associated with the assessment, inspection, and possible repossession of collateral.

Debt Maturity, Ownership Concentration, and Firm Efficiency

I study the relationship between debt maturity and agency conflicts between controlling and minority shareholders in unlisted firms. Exploiting cross-province variance in the development of local credit markets, I find that the monitoring effect of short-term bank debt is more effective in firms with less concentrated ownership structures.

Do Local Bank Branches Reduce SME Credit Constraints? Evidence from Public-Private Bank Interaction

In recent years, commercial banks have substantially reduced the number of their branch offices. We address the question of whether or not the increased distance to lenders caused by branch office closures translates into a lower credit supply for small and medium sized enterprises (SMEs). We use a unique dataset based on 33,000 loan contracts from a state-owned Swedish bank designed to support credit-constrained SMEs, and relate loan size and the interest rate to the number of nearby commercial bank offices. We use an IV strategy to account for potential endogeneity of the number of banks in a region. In line with previous studies, we find that interest rates increase with distance, while loan size decreases with distance. Thus, a larger number of local bank offices increases the local credit supply, and thereby reduces credit constraints of nearby SMEs.

Investor behavior, information disclosure strategy and counterparty credit risk contagion

Counterparty credit risk caused by the excessive expansion of credit derivatives is becoming more and more prominent. The study of evolution mechanism of its contagion will help the financial regulators set up a scientific and accessible prevention and control strategy. From the cross perspective of behavioral finance and information economics, this study analyzes the mechanism of counterparty credit risk contagion. Based on the epidemic model, a network model of it is built with the consideration of investor behavior and information disclosure strategy. The network topology characteristics of it are analyzed in theory. Meanwhile, this study analyzes the evolution characteristics of it in numerical simulation. The main conclusions are as follows: First, investor behavior or information disclosure strategy only affects counterparty credit risk contagion in local credit asset network, while it is gradually disappearing in global credit asset network. Second, noise can enhance the impact intensity of investor behavior or information disclosure strategy on counterparty credit risk contagion, and lead to the spread of counterparty credit risk synchronously in local and global credit asset networks. Third, information transmission rate has “local strengthening effect” on investor behavior. The timing of information release and the tendency of information disclosure exert a “global suppression effect” on the influence of investors, and the ability of investor information decision-making has a “local suppression effect” on the timing of information release and the tendency of information disclosure. Through the comprehensive adjustment of investor behavior and information disclosure strategy, the goal of preventing and controlling counterparty credit risk contagion can be realized in local and global credit asset networks.

The Voskopoja Guild of Tailors’ Credit Lending Operations and Risk Management (1716–27)

The paper analyzes the credit activities of the Voskopoja (Moschopolis) guild of tailors on the basis of a new dataset constructed from its credit lending transactions recorded in a guild register. The dataset was used to understand lending patterns and risk management in the local economy of Voskopoja and compare them with similar practices in other parts of the Ottoman empire. I found that interest rates were not stable in 1716–27 and that the Voskopoja economy experienced an economic growth in this period. This case study contributes to our understanding of Ottoman financial institutions, guilds as lending institutions, their business organization, as well as the operations of local credit markets.