Showing papers on "Credit reference published in 2014"

Does Macro-Prudential Regulation Leak? Evidence from a UK Policy Experiment

Abstract: The regulation of bank capital as a means of smoothing the credit cycle is a central element of forthcoming macro-prudential regimes internationally. For such regulation to be effective in controlling the aggregate supply of credit it must be the case that: (i) changes in capital requirements affect loan supply by regulated banks, and (ii) unregulated substitute sources of credit are unable to offset changes in credit supply by affected banks. This paper examines micro evidence—lacking to date—on both questions, using a unique data set. In the UK, regulators have imposed time-varying, bank-specific minimum capital requirements since Basel I. It is found that regulated banks (UK-owned banks and resident foreign subsidiaries) reduce lending in response to tighter capital requirements. But unregulated banks (resident foreign branches) increase lending in response to tighter capital requirements on a relevant reference group of regulated banks. This “leakage” is substantial, amounting to about one-third of the initial impulse from the regulatory change.

Trust and the provision of trade credit

Abstract: State-controlled listed firms in China receive preferential treatment when borrowing from commercial banks; in contrast, private controlled firms rely on informal finance and on trade credit. We argue for and find evidence that private firms located in higher social trust regions use more trade credit from suppliers, extend more trade credit to customers, and collect receivables and pay payables more quickly. These findings are enhanced for firms located in provinces with weak protection of property rights. Our results are robust to different measures of social trust, legal environment, and endogeneity. Overall, our results show that social trust helps private firms overcome institutional difficulties in financing their activities.

Publishing: Credit where credit is due

Abstract: Liz Allen, Amy Brand, Jo Scott, Micah Altman and Marjorie Hlava are trialling digital taxonomies to help researchers to identify their contributions to collaborative projects.

Comparative Credit Risk in Islamic and Conventional Banks

Abstract: This study considers whether Islamic banks and conventional banks have different levels of credit risk. One problem with existing research in this area is the dominance of accounting information to assess credit risk, and this could be especially misleading in the case of Islamic banking. Using Merton’s distance-to-default (DD) model, a market-based credit risk measure, we evaluate the credit risk of 156 conventional banks and 37 Islamic banks across 13 countries between 2000 and 2012. We also calculate the accounting information-based Z-score and nonperforming loan (NPL) ratio for the purpose of comparison. Our results show that Islamic banks have significantly lower credit risk than conventional banks when measuring credit risk with the DD. In contrast, and as expected, Islamic banks exhibit much higher credit risk using the Z-score and NPL ratio. Overall, the findings suggest that the methodology used plays a significant role in assessing the apparent credit risk of Islamic banks.

Trade credit and SME profitability

Abstract: Financial literature discusses the motives for trade credit provision by suppliers in depth. However, there is no empirical evidence of the effect of granting trade credit on the profitability of small and medium-sized firms. We examine the profitability implications of providing financing to customers for a sample of 11,337 Spanish manufacturing SMEs during the 2000–2007 period. This article also examines the differences in the profitability of trade credit according to financial, operational, and commercial motives. The findings suggest that managers can improve firm profitability by increasing their investment in receivables and that the effect is greater for financially unconstrained firms (larger and more liquid firms), for firms with volatile demand, and for firms with bigger market shares.

The Home Bias and the Credit Crunch: A Regional Perspective

Abstract: Using detailed data on loan applications and decisions for a large sample of manufacturing firms in Italy during the recent financial crisis, we find that the credit crunch has been harsher in provinces with a large share of branches owned by distantly managed banks. Inconsistent with a flight to quality we do not find evidence that economically weaker firms suffered more during the crisis. In contrast, we find that financially healthier firms were affected more in functionally distant credit markets than in markets populated by less distant banks, consistent with a home bias on the part of nationwide banks.

Rating Agency Adjustments to GAAP Financial Statements and Their Effect on Ratings and Credit Spreads

Abstract: Using a dataset of financial statements that are adjusted by Moody's for its credit analysis, I document extensive and large differences between firms' reported U.S. GAAP numbers and firms' adjusted numbers. Off-balance sheet financing accounts for the largest difference. The adjusted leverage ratio exceeds the reported leverage ratio by 20% (70%) for the median (average) firm. Adjusted profitability ratios and cash flow to debt ratios differ from their U.S. GAAP equivalents primarily because of greater adjusted interest expense and greater adjusted debt numbers. This implies that essentially all firms in the sample understate their leverage. In addition to adjusting reported accounting numbers, credit analysts adjust ratings down by an average of 0.38 notches due to credit risk from qualitative factors. I predict and find that rating agency adjustments are associated with greater credit spreads and a flatter credit spread term structure. This implies that credit ratings are a function of quantitative adjustments to U.S. GAAP numbers and the rating agency's qualitative assessment of credit risk arising from soft factors. The results suggest that rating agency's quantitative and soft adjustments capture true default risk and rating agencies efficiently process accounting and soft information. Thus ratings can serve as a contracting device to incorporate off-balance-sheet debt adjustments and credit-risk increasing soft factors.

The State of Small Business Lending: Credit Access during the Recovery and How Technology May Change the Game

Abstract: Small businesses are core to America’s economic competitiveness. Not only do they employ half of the nation’s private sector workforce – about 120 million people – but since 1995 they have created approximately two-thirds of the net new jobs in our country. Yet in recent years, small businesses have been slow to recover from a recession and credit crisis that hit them especially hard. This lag has prompted the question, “Is there a credit gap in small business lending?” This paper compiles and analyzes the current state of access to bank capital for small business from the best available sources. We explore both the cyclical impact of the recession on small business and access to credit, and several structural issues in that impede the full recovery of bank credit markets for smaller loans.

The Real Effects of the Bank Lending Channel

Abstract: For policy and academia it is crucial to quantify the real effects of the bank lending channel. We analyze the impact of securitization of real estate assets on the supply of credit to non real-estate firms, including risk-taking, and the associated real effects. For identification, we use the credit register of Spain, matched with firm- and bank-level balance-sheet data, and generalize the Khwaja and Mian (2008)’s loan-level estimator to firm-level in order to identify the real aggregate effects of the bank lending channel. The robust results suggest a strong impact on credit supply to non real-estate firms of banks’ ability to securitize real-estate assets. However, this strong loan-level credit channel is neutralized by firm-level equilibrium dynamics in good times. In consequence, we find no real and credit effects at the firm-level. Importantly, securitization implies higher bank risk-taking, both by relaxing lending standards of existing borrowers – cheaper and less collateralized credit with longer maturity – and by a credit expansion on the extensive margin to first-time bank borrowers that substantially default more.

Credit Ratings and the Choice of Payment Method in Mergers and Acquisitions

Abstract: This paper establishes that credit ratings affect the choice of payment method in mergers and acquisitions. We find that bidders holding a high rating level are more likely to use cash financing in a takeover. We attribute this finding to lower financial constraints and enhanced capability of highly rated firms to access public debt markets as implied by their higher credit quality. Our results are economically significant and robust to several firm- and deal-specific characteristics and are not sensitive to the method used to measure the likelihood of the payment choice or after controlling for potential endogeneity bias.

Does trade credit play a signalling role? Some evidence from SMEs microdata

Abstract: Using micro-data on small- and medium-sized enterprises, this paper empirically investigates the “signalling hypothesis” formulated on the role of trade credit (Biais and Gollier in Rev Financ Stud 10: 903–937, 1997; Burkart and Ellingsen in Am Econ Rev 94: 569–590, 2004). The research method adopted allows evaluation of the impact of suppliers’ credit on bank debt accounting for the strength (duration) of bank–firm relationships. Our main finding is that trade credit seems to have an information content for banks, especially when the latter do not dispose of adequate (soft) information on firms, which is likely the case at the beginning stages of bank–firm relationships. An implication of our results is that the availability of suppliers credit might be crucial to foster access to institutional funding for new firms entering the market. Our evidence also suggests that banks seem to consider suppliers a reliable source of information on firms’ financial conditions even after several years of lending relationships.

Firm credit in the euro area: a tale of three crises

Abstract: Using survey data from 2009 to 2011, we analyse the effects of the recent euro area economic, financial and private debt crisis on the supply of and demand for bank finance for small and medium enterprises (SMEs). At the country level, we identify three distinct aspects of the recent crisis in the euro area affecting firm credit through different channels. Controlling for country fixed effects, the impact of a weak real economy on firm credit operates both by reducing firms’ demand for bank financing and by lenders increasing loan rejections and tightening terms and conditions on credit allocated. On the other hand, financial conditions have no significant effect on demand, but they do affect credit supply as we find that financial tensions worsen the chances of obtaining credit and its terms and conditions. We interpret this as evidence of a bank balance sheet channel negatively impacting credit provision. We find that private sector indebtedness has important effects on SMEs’ credit access and its terms...

The Real Effects of Liquidity During the Financial Crisis: Evidence from Automobiles

Abstract: This paper shows that illiquidity in short-term credit markets during the financial crisis may have sharply curtailed the supply of non-bank consumer credit. Using a new data set linking every car sold in the United States to the credit supplier involved in each transaction, we show that the collapse of the asset-backed commercial paper market decimated the financing capacity of captive leasing companies in the automobile industry. As a result, car sales in counties that traditionally depended on captive-leasing companies declined sharply. Although other lenders increased their supply of credit, the net aggregate effect of illiquidity on car sales is large and negative. We conclude that the decline in auto sales during the financial crisis was caused in part by a credit supply shock driven by the illiquidity of the most important providers of consumer finance in the auto loan market: the captive leasing arms of auto manufacturing companies. These results also imply that interventions aimed at arresting illiquidity in credit markets and supporting the automobile industry might have helped to contain the real effects of the crisis.

Repossession and the Democratization of Credit

Abstract: We exploit a 2004 credit reform in Brazil that simplified the sale of repossessed cars used as collateral for auto loans. We show that the reform expanded credit to riskier, self-employed borrowers who purchased newer, more expensive cars. The legal change has led to larger loans with lower spreads and longer maturities. Although the credit reform improved riskier borrowers' access to credit, it also led to increased incidences of delinquency and default. Our results shed light on the consequences of a credit reform and highlight the crucial role that collateral and repossession play in the liberalization and democratization of credit.

Do Equity Markets Favor Credit Markets News Over Options Market News

Abstract: Credit default swap and equity options markets often experience abnormal swings prior to the announcement of negative credit news. Option prices reveal information about such forthcoming adverse events at least as early as credit spreads, except for negative earnings announcements. Prior to negative credit news being announced, the equity market does not respond to abnormal movements in option prices unless that information has also manifested itself in credit spreads, perhaps because options are perceived as more likely to trade on unsubstantiated rumors than default swaps.

The Effect of Sovereign Wealth Funds on the Credit Risk of Their Portfolio Companies

Abstract: We study how sovereign wealth fund (SWF) investments affect the credit risk of target companies as measured by the change in their credit default swap (CDS) spreads around the investment announcement. Our analysis is based on a sample of 391 SWF investments in 198 companies between 2003 and 2010. Our results indicate that the CDS spread of target companies decreases, on average, following an SWF investment. The reduction in the CDS spread is higher when the SWF is established by a politically stable non-democratic country that has a neutral political relationship with the host country of the target company. The results are robust to different definitions of the dependent variable in terms of event window, CDS maturity and calculation of the benchmark CDS spread. Our results suggest that creditors expect SWFs to protect target companies from bankruptcy when it is in the interest of their home country to build political goodwill in the host country of the company.

Credit Bureaus and Registration and Access to Finance: New Evidence from 42 African Countries

Abstract: Using new data from 42 African countries, we investigate the effects of public and private credit registries on firms' access to finance as well as the effect of public credit registries' design on the severity of the financing constraint. Our results show that access to finance is on average higher in countries with private credit bureaus (PCBs), relative to countries with public credit registries (PCRs) or countries with neither institution. However, there is a significant heterogeneity in access to finance among countries with PCRs as well as the design of these institutions. We find that countries with PCRs that collect positive and negative information on borrowers' credit histories are associated with firms reporting smaller obstacles in access to finance. Likewise, we show that provision of online credit information is only beneficial when the internet penetration rate in the country is high and that reducing minimum cut-off for loan coverage by PCRs helps soften the financing constraint only when positive and negative information is provided.

Asset reliability and security prices: evidence from credit markets

Abstract: We assess the relation between asset reliability and security prices. Concerns about asset reliability are increasing with the move to fair value accounting in general purpose financial reports. We provide pertinent evidence from credit markets. A key benefit of using credit market data to explore the capital market implications of asset reliability is the theoretical basis of Duffie and Lando (Econometrica 69(3):633–664, 2001). They show that asset reliability (measurement) concerns should be concentrated in short-term credit spreads. Thus a focus on credit term structure can facilitate a cleaner identification of the impact of asset reliability on security prices. We find that asset reliability issues, attributable to SFAS 157 disclosures of Level 2 and, especially, Level 3 financial assets for a set of US financial institutions over the period of August 2007 to March 2009, are a significant determinant of short-term credit spreads and the shape of the general credit term structure. Our findings are robust to a variety of control variables and research design choices.

Identifying Channels of Credit Substitution When Bank Capital Requirements are Varied

Abstract: What kinds of credit substitution, if any, occur when changes to banks’ minimum capital requirements induce banks to change their supply of credit? The question is central to the new ‘macroprudential’ policy regimes that have been constructed in the wake of the global financial crisis, under which minimum capital ratio requirements for banks will be employed to control the supply of bank credit. Regulatory efforts to influence the aggregate supply of credit may be thwarted to some degree by ‘leakages’, as other credit suppliers substitute for the variation induced in the supply of credit by regulated banks. Credit substitution could occur through foreign banks operating domestic branches that are not subject to capital regulation by the domestic supervisor, or through bond and stock markets. The UK experience for the period 1998-2007 is ideally suited to address these questions, given its unique regulatory history (UK bank regulators imposed bank-specific and time-varying capital requirements on regulated banks), the substantial presence of both domestically regulated and foreign regulated banks, and the United Kingdom’s deep capital markets. We show that leakage by foreign branches can occur either as a result of competition between branches and regulated banks that are parts of separate banking groups, or because a foreign banking group shifts loans from its UK-regulated subsidiary to its affiliated branch. The responsiveness of affiliated branches is nearly twice as strong. We do not find any evidence for leakages through capital markets. These findings reinforce the need for the type of international co-ordination, specifically reciprocity in capital requirement regulation, which is embedded in Basel III and the European CRD IV directive, which will be gradually phased in starting January 2014.

Equipping entrepreneurs: consuming credit and credit scores

Abstract: On-line products that make an individual's credit score an object of consumption and equip credit consumers with the capacity to improve their score are shown to exemplify two sets of dynamic tendencies to change in mass market consumer credit. First, as credit consumers are differentiated, sorted and targeted by lenders according to credit scores, they are no longer merely disciplined as individual bodies responsible for making repayments. Rather, and after Deleuze, they are “controlled” through the risk-based prices that they pay as an array of disaggregated “dividuals.” Second, the credit consumer is summoned-up as an entrepreneurial subject, in the terms of Foucault, a rational and hopeful figure. The credit consumer now appears as a subject who not only anxiously meets repayments, but who seeks rewards from managing uncertainties over future access to credit at competitive rates by investing optimism in the very mechanisms of marketized control that govern credit relations.

Systems and methods for microfinance credit data processing and reporting

Abstract: Systems and methods are provided for processing microfinance-related credit data and generating credit reports based on the processed microfinance credit data. In some embodiments, a credit report/score generation system (130) generates a microfinance credit report according to relevant data rules module (132A), display rules module (132B) and other relevant reporting format information. Payment status may be determined for each entry in a payment grid, which may correspond to a payment interval such as, for example, daily, weekly or monthly. Credit reports may be generated with selectable options enabling the user to view at least one other payment grid having entries corresponding to a different payment interval.

Partial credit guarantees and firm performance: evidence from Colombia

Abstract: This paper studies the effect of government-backed partial credit guarantees on firms’ performance in Colombia. These guarantees are automatically granted by the National Guarantee Fund (NGF) to firms without enough collateral to lift their credit constraints. We put together a panel of firms covering the period 1997–2007 that allows us to control for observed and unobserved firm characteristics potentially affecting both the selection of firms into the program and firms’ performance. We find that firms that gain access to credit backed by the NGF were able to grow in terms of both output and employment. However, we do not find any effect on productivity, wages, or investment.

Loan demand and rationing among small-scale farmers in Nigeria.

Abstract: The credit market serving agriculture in Nigeria is encumbered by operational and administrative inadequacies and the discriminatory tendencies of financial institutions. The government has implemented policies to redress the situation, but small-scale farmers have not benefited from these incentives to any reasonable degree. This makes it imperative to examine the factors circumscribing loan demand and the various rationing mechanisms. To this end, this study seeks to (1) examine the nature of risks facing small-scale farmer-borrowers in Nigeria, (2) analyze the demand for agricultural credit by farmers and highlight the key determinants of this demand, (3) ascertain the extent to which farmers are credit rationed and the factors influencing the emerging rationing scenarios, and (4) suggest policy measures to address the problem of agricultural credit rationing and enhance the demand for credit. The study employs primary data obtained from 1,200 small-scale farmers through a survey conducted in 2013 across the six geopolitical zones of the country. Methodologically, the study extends the analysis of credit rationing beyond quantity rationing and presents explicit econometric models for analyzing the determinants of three types of credit rationing: quantity rationing, risk rationing, and price rationing. The seemingly unrelated regression model is employed to ascertain the determinants of credit rationing. The results show that there is a higher probability that farmers will be rejected than that they will be given a loan amount lower than what was requested. We find that gender, geographical location, and marital status have no statistically significant effect on the probability that farmers will be quantity rationed. To address the credit rationing challenges and improve demand for loans by small-scale farmers, we urge banks to mobilize their resources to train potential borrowers and establish loan-monitoring committees at the grassroots level to serve as insurance against the risk of loan default.

The impact of credit information sharing reforms on firm financing

Abstract: This paper analyzes the impact of introducing credit information-sharing systems on firms' access to finance. The analysis uses multi-year, firm-level surveys for 63 countries covering more than 75,000 firms over the period 2002-13. The results reveal that credit bureau reforms, but not credit registry reforms, have a significant and robust effect on firm financing. After the introduction of a credit bureau, the likelihood that a firm has access to finance increases, interest rates drop, maturity lengthens, and the share of working capital financed by banks increases. The effects of credit bureau reforms are more pronounced the greater the coverage of the credit bureau and the scope and accessibility of the credit information-sharing scheme. Credit bureau reforms also have a greater impact on firms' access to finance in countries where contract enforcement is weaker. Finally, there is some evidence that the effects of credit bureau reform are more pronounced for smaller, less experienced, and more opaque firms.