Borrower Quality Research Articles

Can Conventional Monetary Policy Stimulate Bank Credit? Evidence from a Developing Country

The predominance of bank credit in financing the economies of less developed countries is prompting policymakers to stimulate this mode of financing. This study tests the ability of conventional monetary policy to stimulate the supply of bank credit to the private sector in Morocco. Based on the lending channel as a theoretical framework, an analytical framework to explore the conduct of monetary policy and the preconditions for the functioning of this channel was developed. In addition, a test of the impact of monetary policy on credit supply was conducted using bank-level data from a representative sample of the Moroccan banking sector. The results show that demand factors and the quality of potential borrowers are the main drivers of bank credit growth. They also show that monetary policy in Morocco directly affects credit growth. However, no evidence that this impact is mediated through credit supply was provided, indicating that the credit channel is not operational in Morocco. The policy implications of these results are discussed.

Reservation Rates in Interbank Money Markets

AbstractThis paper proposes a dyadic econometric model with reservation rates to control for endogenous matching in interbank money markets. We apply our method to a unique data set and study the interbank market during the European sovereign debt crisis. The estimates uncover the existence of reservation rates, their omission can bias important quantities like the discount enjoyed by big banks, a potential measure of the “too‐big‐to‐fail” subsidy. We test predictions of various theories on the interbank market. The market did not freeze completely during the crisis and active peer monitoring was still in place under limited information asymmetry. Dispersion in rates and liquidity hoarding was driven by banks' nationality, regardless of the borrower quality.

Cleansing by tight credit: Rational cycles and endogenous lending standards

Endogenous cycles emerge through the two-way interaction between lending standards and production fundamentals. Lax lending standards in booms lead to low interest rates and high output but the deterioration of future loan quality. Low borrower quality in turn precipitates tight standards: the economy enters a recession with high credit spreads and low output but a gradual improvement in the quality of loans. This eventually triggers a shift back to a boom with lax lending, and the cycle continues. The capitalization of expert investors determines the strength of capital reallocation in recessions. Furthermore, although the constrained efficient economy is often cyclical, it features both a static and a dynamic externality in credit supply, hence differing from the decentralized equilibrium.

In the shadow of big tech lending

We investigate the impact of Big Tech lending on non-bank traditional lenders, which have a more overlapping clientele with Big Tech lenders than traditional banks. Our empirical methodology exploits geographical differences in Big Tech penetration ratios and adopts the instrumental variable (IV) approach using the FinTech payment adoption ratio and the distance to the Big Tech's headquarter. We find that the competition from Big Tech worsens the performance of branches facing stronger Big Tech competition by reducing the number of borrowers and the amount of loans. Moreover, branches in cities highly penetrated by Big Tech lending tighten the lending standard by reducing loan-to-value (LTV) ratios, measured as the approved loan amount per unit collateral value, while keeping the average collateral requirement unchanged. Our findings are consistent with the cream-skimming hypothesis that Big Techs possess better screening technology and reduce the quality of borrowers applying for traditional loans. Our results document novel changes in and responses of the non-bank traditional lending business in the Big Tech era.

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.

Is blockchain a cure for peer-to-peer lending?

The blockchain, a decentralized ledger system, has been considered a revolutionary technology to transform businesses, including the financial markets. As peer-to-peer (P2P) lending is also known for decentralization in the sense that individuals borrow from and lend to each other directly, bypassing traditional banks, we explore the possibility and benefits of blockchains in P2P lending. We first provide an economic analysis of existing P2P lending problems, including herding and platform-borrower collusion, with and without the blockchain mechanism. We note that, compared with the existing markets, blockchain-backed P2P lending is highly effective in privacy preservation and borrower quality distinction. Since the role of intermediaries is eliminated in the blockchain world, the chance of platform-borrower collusion is also minimized. Moreover, we show that borrowers and lenders can expect additional surplus when the origination fee in traditional P2P lending is replaced with a smaller tokenization cost and when borrowers present a more accurate financial incentive in a smart contract. With the smart contract, borrowers are allowed to propose optimal interest rates based on their creditworthiness and capacity of repayment while detailed personal information is not required. Additionally, we demonstrate that small investors’ surplus can be further enhanced due to the elimination of herding.

Cross-border interbank liquidity, crises, and monetary policy

We analyze how the Lehman and sovereign crises affect cross-border interbank liquidity, exploiting euro-area proprietary interbank data, crisis and monetary shocks, and loan terms to the same borrower during the same day by domestic versus foreign lenders. Crisis shocks reduce the supply of cross-border liquidity, with stronger volume than pricing effects. On the extensive margin, results suggest that the cross-border credit crunch is independent of borrower quality, while—on the intensive margin—riskier borrower banks suffer more. Moreover, the cross-border liquidity crunch is substantially stronger for term loans, and weaker for foreign lender banks that have a subsidiary in the same country than the borrower. Finally, nonstandard monetary policy improves interbank liquidity, but without fostering strong re-integration of cross-border interbank markets.

Application of Credit Risk Scoring Methods in Corporate Borrower Monitoring

A method for assessing the risk of default of a corporate borrower at the monitoring stage based on a scoring assessment is proposed. This paper provides proof of the hypothesis that scoring methods for assessing credit risks can be used not only at the stage of initial assessment of a potential borrower when making a decision on lending, but also at the stage of its monitoring when accompanying a transaction. Monitoring is a periodic review of the credit quality of the corporate borrower with whom the loan agreement is concluded. This is done for the purpose of timely detection of negative signals, as well as timely response to threatening trends in the borrower's activities. Some credit institutions save on monitoring by relying on the decision-making system, considering it flawless. However, this saving can be a fatal mistake, since many things change over time during the "life" of the enterprise. This is facilitated by both external factors (political, economic) and internal (incorrect development strategy of the organization, inability to assess its own credit capabilities, unscrupulous counterparties). The proposed method is a system of automatic risk signals that have been tested for predictive ability, excluding manual procedures. The proposed solution includes markers (risk signals) that have a predictive ability above average, which can lead to a default of the corporate borrower. In addition, color marking is applied – red, yellow, green, which allows you to visualize the criticality of the identified risk signal depending on the predictive ability - a visual representation of the borrower's risks in order to facilitate interpretation. The analysis of the developed method showed how much it is possible to speed up the monitoring process, which will allow for a prompt response to the identified risk signals, as well as to predict the likely deterioration of the borrower's credit quality in the loan or guarantee portfolio without compromising the quality of risk assessment.

Monitoring and incentives under multiple-bank lending: The role of collusive threats

We examine interactions between multiple bank-loan officer-borrower hierarchies. Possibility of collusion between the borrower and the loan officer(s) in charge of monitoring shapes incentives for the loan officers. When ‘borrower quality is low’, collusive threats induce over-monitoring in a collusion-free equilibrium, whereas for high borrower quality, monitoring is at its non-delegation level—an outcome akin to vertical integration. Under multiple-bank lending, delegation contracts may solve the free-riding problem in monitoring, and lead to more intense monitoring relative to single-bank lending. This is because collusive threats make monitoring efforts strategic complements because of a novel ‘rent-jamming’ effect—a hitherto unexplored effect of multiple-bank lending. We further show that a bank may decide not to employ a monitor and free-ride on the information gathered by the loan officer of the other bank, which in turn provides a new rationale for syndicated lending based on collusive threats. Moreover, consistent with recent empirical evidence, our analysis implies that bank monitoring behaves counter-cyclically.

Impacts of service quality on future intentions of loan purchase under the mediating of borrowers’ bank image and moderating Fatwa and Sharia supervisory board reputation

The purpose of this study is to test the moderating role of fatwa and Sharia supervisory board unit reputation in the relationship between service quality dimensions and borrowers’ bank image. It will also assess the mediating role of borrowers’ bank image in the relationship between service quality dimensions and future purchase intentions of loans. Questionnaire surveys are used to collect data by convenience sampling from the loan borrowers in Saudi Arabian Islamic banks. Structural equation modeling was performed to analyze 370 usable responses. The study finds that service quality dimensions have varying effects on loans future purchase intentions, the borrowers’ bank image fully and partially mediates the relationship between service quality dimensions and loans future purchase intentions (LFPI), and the fatwa and Sharia supervisory board reputation moderating the influence of service quality responsiveness on borrowers’ bank image. Bank image and fatwa and Sharia supervisory board reputation influences on future purchase intention were assessed by personal loan borrowers, and future studies could be conducted on other bank loan borrowers (corporate) according to their difference in the goal of loaning. The bank managers should be aware of the fatwa board's reputation influences on borrowers’ bank image and loan future purchase intentions. This research adds to the existing body of reputation and image management literature in the Islamic banking context by comprehending how specified service quality dimensions can improve the borrowers’ bank image and increase loan purchase intentions. The study is the first attempt to discover empirical support to the role of fatwa and Sharia supervisory board reputation in increasing the bank’s image and loans future purchase intentions at Islamic banks.

Big data analytics in digital platforms: how do financial service providers customise supply chain finance?

PurposeThis study examines the role of financial service providers (FSPs) in assessing the supply chain credit of small and medium-sized enterprises (SMEs) and how they help SMEs obtain supply chain finance (SCF) through an established digital platform using big data analytics (BDA).Design/methodology/approachThis study conducted data mining analysis on the archival data of China's FSPs in the mobile production industry from 2015 to 2018, using neural networks in the first stage and multiple regression in the second stage.FindingsThe findings suggest that digital platforms sponsored by FSPs have a discriminative effect based on implicit BDA on identifying the quality and potential risks of borrowers. The results also show that tailored information utilised by FSPs has a supportive effect based on explicit BDA in helping SMEs obtain financing.Originality/valueThis study contributes to the emergent research on BDA in supply chain management by extending the contextual research on information signalling and platform theory in SCF. Furthermore, it examines the distinctive financing decision models of FSPs and provides a solution that addresses the information deficiency and overload of both lenders and borrowers and plays a certain reference role in alleviating the financing problems of SMEs.

Credit Supply and Demand in Unconventional Times

AbstractDo borrowers demand less credit from banks with weak balance sheets, following monetary policy shocks? To answer this, we use novel bank‐specific survey data matched with balance sheet information for euro area banks. We find that, following a monetary policy shock, bank strength influences credit demand as well as credit supply. Bank resilience is important for firms when selecting a lender and it is therefore vital to control for bank‐specific demand when identifying credit supply shocks. An application using bank‐specific demand shows that—even after fully controlling for demand, borrower quality, and bank strength—unconventional monetary policies stimulate loan supply.

Credit Information Sharing and Loan Loss Recognition

ABSTRACT Does enhancing banks' information sets and understanding of credit risks improve loan loss recognition? We study this question using a global dataset of staggered initiations and coverage increases of public credit registries (PCRs). Mandated by national regulators, PCRs collect borrower and loan information from lenders and share it with the banks in the financial system. This setting represents a significant improvement in banks' assessment of loss events. We find that PCR initiations and coverage reforms enhance the timeliness of banks' loan loss recognition—the extent to which loan loss provisions capture subsequent nonperforming loans. The effects are greater when PCRs distribute more information and are not driven by changes in borrower quality or supervisory stringency. Overall, these inferences are consistent with improvements in banks' information sets leading to better provisioning decisions. JEL Classifications: D82; G21; G28; G32; M41.

The Impact of Balance Sheet Lending versus Securitization Booms on the Severity of the Great Recession

I separately estimate the effect of local credit booms driven by balance sheet lending and those driven by securitization during the 2002-2006 period on the severity of the 2007-2009 recession in the United States. I construct a novel dataset, linking publicly available data on residential mortgage originations from the Home Mortgage Disclosure Act together with bank financial statements and county level economic outcomes. I exploit geographic variation in bank origination activity across counties to construct county level measures of exposure to securitization and balance sheet lending activity during the 2002-2006 period that are orthogonal to local economic conditions. Results show that 2002-2006 securitization exposure is predictive of sharper declines in home prices, employment, and a rise in mortgage delinquencies during the subsequent crisis period. The same is not true for balance sheet lending, which does not affect crisis period home prices and generates a drop in employment that is con fined to the nontradable sector. Results suggest that this difference is driven by risk taking that is specific to securitized lending. Balance sheet booms generate an expansion in lending to higher quality borrowers, while securitization booms increase credit availability at the lower end of the credit distribution.

Can Time‐Varying Risk Premia and Household Heterogeneity Explain Credit Cycles?

Using micro-level household mortgage data, I measure dispersion in the credit quality of borrowers in the housing market and show that it forecasts regional real economic activity. I provide empirical evidence that associates the predictive power of dispersion with heterogeneity in the exposure of households' labor income to economy-wide shocks. I explain these observations in a model featuring time-varying risk premia, incomplete markets, and household heterogeneity. Due to risk aversion, the consumption and investment responses of households have a convex association with their labor income exposure to aggregate risks. As a result, dispersion forecasts the aggregate output more strongly in more heterogeneous regions, consistent with the data.

Bank Monitoring and Financial Reporting Quality: The Case of Accounts Receivable–Based Loans*

ABSTRACTUsing novel receivable‐based loan data, we study the effect of aging‐report loan covenants on borrowers' accounts receivable reporting quality. Our purpose is to highlight a channel that lenders use to obtain private information and to understand whether lenders' information acquisition affects the financial reporting quality of borrowers. Compared to receivable‐based borrowers without aging‐report requirements (control firms), borrowers with such requirements (test firms) increase their receivable reporting quality significantly after loan initiations. The shift in reporting quality is more pronounced when borrowers have weak bargaining power. Our results lend support to the argument that lender information access affects borrowers' reporting quality.

The Importance of a Borrower’s Track Record on Repayment Performance: Evidence in P2P Lending Market

In peer-to-peer (P2P) loan markets, as most lenders are unskilled and inexperienced ordinary individuals, it is important to know the characteristics of borrowers that significantly impact their repayment performance. This study investigates the effects and importance of borrowers' past repayment performance track record within the platform to identify its predictive power. To this end, I analyze the detailed loan repayment data from two leading P2P lending platforms in Korea using a Cox proportional hazard, multiple linear regression, and logit models. Furthermore, the predictive power of the factors proxied by borrowers' track records are evaluated through the receiver operating characteristic (ROC) curves. As a result, it is found that the borrowers' past track record within the platform have the most important impact on the repayment performance of their current loans. In addition, this study also reveals that the borrowers' track record is much more predictive of their repayment performance than any other factor. The findings of this study emphasize that individual lenders must take into account the quality of borrowers' past transaction history when making a funding decision, and that platform operators should actively share the borrowers' past records within the markets with lenders.

From the Black Swan, to the Snowball. Risks of COVID-19 Pandemic for Consumer Credit Scores in the Lack of a Harmonized Regulatory Intervention

In light of the harmful and wide-ranging effect of the coronavirus pandemic, many governments in the European territory and on the global framework rushed to introduce forms of financial support for those groups that are susceptible to be economically affected by the current situation in order to limit the economic fallout of the pandemic. Still, and in spite of the significant level of regulatory intervention, no major normative change addressed the area of consumer spending and consumer credit. Considering the expected length of the phenomenon, and its impact on the economy and employment, the management of consumers’ economic exposure and of unpaid debt is though meant to emerge as a major consequence during and after the expiration of the pandemic: in particular, significant risks are related to the consequences that the deterioration of consumers’ exposure caused by the COVID-19 and the pandemic-related factors is likely to have on their credit scores (and, subsequently, in terms of outcome of future creditworthiness assessments). Scores have a major impact on consumer credit landscape, and badly determined/distorted scores invest both consumers and credit operators: consumers are precluded from accessing credit in a moment of financial distress; banks and other institutions are not able to properly discriminate between the quality of potential borrowers, therefore facing risks of overexposure to losses and unprofitable operativity. In order to prevent a further worsening of the (already distressed) global economic health, it is therefore pivotal to promptly introduce harmonized corrective measures to mitigate the risk of unsought deviation in the credit scoring sector. The research investigates the impact of the events related to the COVID-19 infection on the scoring software’s functioning, considering how the pandemic is likely to impact on both macro and microeconomic factors related to consumer behavior and indebtedness. The analysis is then developed in order to provide a set of recommendations for interventions with the aim to preserve algorithms’ stability, accuracy and predictive power over the pandemic and during its aftermath.

Bank Monitoring and Financial Reporting Quality: The Case of Accounts-Receivable-Based Loans

Using novel receivable-based-loan data, we study the effect of aging-report loan covenants on borrowers’ accounts receivable reporting quality. Our purpose is to highlight a channel that lenders use to obtain private information and to understand whether lenders’ information acquisition affects the financial reporting quality of borrowers. Compared to receivable-based borrowers without aging-report requirements (control firms), borrowers with such requirements (test firms) increase their receivable reporting quality significantly after loan initiations. The shift in reporting quality is more pronounced when borrowers have weak bargaining power. Our results lend support to the argument that lender information access affects borrowers’ reporting quality.

The Decline of Secured Debt

The share of secured debt issued (as a fraction of total corporate debt) declined steadily in the United States over the twentieth century. This stems partly from financial development giving creditors greater confidence that high quality borrowers will respect their claims even if creditors do not obtain security up front. Consequently, such borrowers prefer retaining financial flexibility by not giving security up front. Instead, security is given contingently – when a firm approaches distress. This also explains why superimposed on the secular decline, the share of secured debt issued is countercyclical.