Revolving Credit Lines Research Articles

THE UNPRECEDENTED FALL IN U.S. REVOLVING CREDIT

AbstractAfter decades of consistent growth, U.S. revolving credit declined drastically post 2009. We study the Ability to Pay provision of the Credit CARD Act of 2009, a policy that restricts credit card limits, as a contributing factor. Extending a model of revolving credit lines, we find that the policy accounts for 54–60% of the decline in revolving credit. Furthermore, the policy accounts for lower utilization rates despite tighter credit limits and higher spreads despite lower default risk. The policy's goal of consumer protection is achieved for a few consumers with time‐inconsistent preferences; most individuals are hurt.

Синдицированное кредитование для малого и среднего бизнеса

Being one of the main instruments of corporate financing, a syndicated loan is provided to the borrower by two or more lenders, subject to the use of standard legal documentation. The subject of the study is the syndicated lending market as a source of attracting financing for small and medium—sized businesses. The objectives of the work are to establish the advantages and disadvantages of syndicated loans from the point of view of borrowers in the segment of small and medium—sized businesses; description of syndicated lending market instruments – revolving credit lines, term loans, investment financing transactions that can be used by borrowers to attract credit resources; comparative analysis of "classic" syndicated loans and syndicated transactions for small and medium-sized businesses on such parameters as applicable tools, loan volume, loan term, transaction participants, legal documentation, information package, transaction implementation schedule. The article concludes that a syndicated loan can become an important tool for attracting financing for small and medium-sized businesses. Such transactions will be carried out by banks, which are the main financial partners of borrowers, using standard forms of legal documentation and using specialized financial technologies to optimize the transaction process. The combination of these factors will allow a new segment of the Russian syndicated lending market to appear in the future – a segment of transactions for borrowers of small and medium-sized businesses.

Revolving credit lines and targeted search

I propose a model of revolving credit lines and targeted search to analyze what accounts for the profitability of the U.S. credit card industry. My analyses lead to two main findings. First, the search friction has minimal impact on the level of profitability of the credit card industry. Most of the profitability is a result of the lender choosing the terms of contract. Second, improved information about consumers accounts for the fall in profitability since the 1980s. Consistent with the data, lenders respond to more information by increasing credit card limits and lowering markups.

The Co-holding Puzzle: New Evidence from Transaction-Level Data

The tendency of consumers to hold low-yield liquid savings while simultaneously holding high-cost unsecured credit on revolving credit lines is a long standing puzzle in economics. Using detailed and highly disaggregated data on spending, income, bank account balances, and consumer credit, we examine the empirical relevance of the competing explanations for such The disaggregated nature of the data allows us to calculate co-holding at daily frequency, enabling us to make a threefold contribution to the literature. First we present new daily measures that reveal that co-holding occurs on approximately 15% of individual x days in our baseline calculations. Most spells of co-holding are also short, lasting less than one calendar month. Second, we evaluate the level of measurement error involved in using traditional, more aggregate, data sources. Finally, we examine the empirical relevance of the competing explanations for co-holding. When brought to the data, we find that co holding appears to be driven by behavioral rather than rational forces. More specifically, we find evidence in support of explanations for co-holding based upon mental accounting and a desire to hold a buffer of liquid savings, while we find rational explanations for co-holding to be empirically much less relevant.

Does Change in the Information Environment Affect Financing Choices?

Using brokerage mergers and closures as natural experiments, we examine how exogenous changes in the information environment affect a firm’s financing choice. Our difference-in-differences approach shows that exogenous increases in information asymmetry lead firms to substitute away from equity and public debt toward bank debt. Firms with higher risk tend to substitute equity for bank debt, and firms with lower risk tend to substitute bonds for bank debt. The effect of the change in the information environment on a firm’s financing choice is more pronounced for firms with worse information environments, such as those with few initial analysts and younger firms. We demonstrate that the mechanism of the change is through a reduction of the issuance of equity and bonds but with an increase of the issuance of bank loans. Further analysis reveals that such firms tend to reduce long-term borrowing, reduce their issuance of subordinated debt, and increase their revolving credit lines. This paper was accepted by Tomasz Piskorski, finance.

When Markets, Consumers and Regulators Collide: Overdrafts in the US, UK and Israel

There is a fierce debate in the United States about whether to regulate overdrafts and, specifically, about whether to limit their use or cap overdraft prices. Proponents of regulation claim that overdrafts are not marginally priced and cause financial harm. Opponents of regulation claim that capping overdraft prices will harm consumers by limiting access to overdraft credit and causing transactions to be rejected. This paper conceptually unpacks some of these claims, while comparing the overdraft markets in the United States, the United Kingdom, and Israel. First, I argue that overdrafts can fulfill three different functions: (1) unintentional overdrawing and insurance against the rejection of transactions, (2) short-term “emergency” credit, and (3) long-term revolving credit lines. This distinction sheds light on why overdrafts are priced differently in each country, and how they compete with products such as payday lending and credit cards. Thus, while prices in the United States may be non-marginal when compared to short-term high-cost credit such as payday loans, competition with credit card companies might explain why overdrafts in the United States aren’t provided as long-term revolving credit at significantly lower prices, as is the case in Israel and the United Kingdom. Next, I offer that regulatory intervention must be tailored to each of these functions, addressing the unique market failures and cognitive biases associated with each of them. Inadvertent overdrafts can be mitigated with the use of technology and real-time notifications, and must coincide with the regulation of insufficient-funds charges. When overdrafts are used as emergency, short-term funds, they should be equated to other short-term high-cost credit, such as payday loans. Since banks have significantly lower overhead and risk-based costs, this indicates banks may be charging excessive prices, while exploiting consumers’ biases. Finally, while consumers in the United Kingdom and Israel may benefit from lower prices for inadvertent overdrafts and long-term credit, the design of overdrafts in these countries might reduce consumers’ welfare by limiting their ability to devise self-control mechanisms, exacerbating overconsumption and leading to high, chronic, and persistent levels of debt.

Pricing and usage: An empirical analysis of lines of credit

The hypothesis that committed revolving credit lines with fixed spreads can provide firms with interest rate insurance is a standard feature of models on these credit facilities’ interest rate structure. Nevertheless, this hypothesis has not been tested. Its empirical examination is the main contribution of this paper. To perform this analysis, and given the unavailability of data, we hand-collect data on usage at the credit line level itself. The resulting dataset enables us also to take into account characteristics of credit lines that have been ignored by previous research. One of them is that credit lines can have simultaneously fixed and performance-based spreads.

Pricing and Usage: An Empirical Analysis of Lines of Credit

The hypothesis that committed revolving credit lines with fixed spreads can provide firms with interest rate insurance is a standard feature of models on these credit facilities’ interest rate structure. Nevertheless, this hypothesis has never been tested. Its empirical examination is the main contribution of this paper. To perform this analysis, and given the unavailability of data, we hand-collect data on usage at the credit line level itself. The resulting dataset enables us also to take into account characteristics of credit lines that have been ignored by previous research. One of them is that credit lines can have simultaneously fixed and performance-based spreads. Our results for credit lines that give the option to borrow at fixed and variable spreads support the hypothesis that fixed spread credit lines are used as hedging instruments. However, this hypothesis is inconsistent with our results for credit lines that only allow borrowing at fixed spreads.

Credit Exposure and Valuation of Revolving Credit Lines

A revolving credit line is one of the most common forms of commercial bank loan. Fixing the interest rate and the maximum loan amount but not the utilization pattern introduces several types of uncertainty into the contract. In practice, in addition to the interest on the drawn amount, a variety of different fees and charges may be imposed, although generally not all at once. This leads to interesting optimal behavior for the borrower in the face of stochastic fluctuation in market interest rates and borrower credit quality. For example, the borrower can raise funds in the open market if the interest rate is lower there but has the option to draw against the line at the original rate if its creditworthiness weakens. Jones and Wu present a model incorporating these special features and explore how they affect optimal loan terms and borrower behavior. Interesting results include the fact that because of the borrower’s option to draw on the credit line when its creditworthiness weakens, the lender cannot make money on the deal without incorporating extra fees on top of the interest on the borrowed principal.

Pricing corporate loans under the risk-neutral measure

Corporate loans trade infrequently, and most methods for discounting loan cashflows ignore the effects of default and prepayment and are unable to value revolving loans. To improve loan valuation and risk management, we develop a risk neutral model to value corporate loans and revolving credit lines. The method models the credit-dependent prepayment option and revolver usage patterns using a lattice of risk-neutral credit transitions determined from historical data and modified to be consistent with market prices of credit default swaps. The model calculates average lives of loans, their average times to default, and loan-price sensitivities to market movements.

Credit Exposure and Valuation of Revolving Credit Lines

Credit Exposure and Valuation of Revolving Credit Lines

Weak Institutions and Credit Availability: The Impact of Crime on Bank Loans

This paper analyzes the relationship between the terms on bank loans and local crime rates, employing a sample of over 300,000 bank-firm relationships. Controlling for firm, market and bank characteristics the results show that where the crime rate is higher borrowers pay higher interest rates, pledge more collateral, and resort less to asset-backed loans and more to revolving credit lines than borrowers in low-crime areas. The evidence also suggests that access to credit is adversely affected by crime. The offenses that affect the loan market are those that exogenously increase firm fragility (extortion, organized crime) and raise loss given default (fraud, fraudulent bankruptcy).

Credit Exposure and Valuation of Revolving Credit Lines

The revolving credit line is the dominant form of commercial bank lending. We present an arbitrage-free valuation method incorporating the borrower's stochastic credit quality process and drawdown behavior. Credit exposure is measured by the size of fixed balance loan of identical term having the same cost of default protection via credit default swap. Multi-fee structures and performance pricing are incorporated. Numerical experiments reveal important characteristics of credit line values.

Biblical Safeguards and Traditions as Potential Guidance for the Lending of Monies

Some individuals and businesses have become increasingly dependent upon multiple financing sources for economic survival. Certain currently used lending policies, such as interest-only loans and revolving credit lines, may encourage borrower dependency on the lender. The paper reviews religious teachings, specifically religious safeguards on lending identified in primary Jewish sources including the Tanach and rabbinic teachings, and finds that the safeguards in place centuries ago may still be relevant for lending practices today to both protect the borrower while still providing a profitable means to help borrowers.