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Showing papers on "Credit risk published in 1981"


Posted ContentDOI
TL;DR: In this paper, a model is developed to provide the first theoretical justification for true credit rationing in a loan market, where the amount of the loan and amount of collateral demanded affect the behavior and distribution of borrowers, and interest rates serve as screening devices for evaluating risk.
Abstract: According to basic economics, if demand exceeds supply, prices will rise, thus decreasing demand or increasing supply until demand and supply are in equilibrium; thus if prices do their job, rationing will not exist. However, credit rationing does exist. This paper demonstrates that even in equilibrium, credit rationing will exist in a loan market. Credit rationing is defined as occurring either (a) among loan applicants who appear identical, and some do and do not receive loans, even though the rejected applicants would pay higher interest rates; or (b) there are groups who, with a given credit supply, cannot obtain loans at any rate, even though with larger credit supply they would. A model is developed to provide the first theoretical justification for true credit rationing. The amount of the loan and the amount of collateral demanded affect the behavior and distribution of borrowers. Consequently, faced with increased credit demand, it may not be profitable to raise interest rates or collateral; instead banks deny loans to borrowers who are observationally indistinguishable from those receiving loans. It is not argued that credit rationing always occurs, but that it occurs under plausible assumptions about lender and borrower behavior. In the model, interest rates serve as screening devices for evaluating risk. Interest rates change the behavior (serve as incentive mechanism) for the borrower, increasing the relative attractiveness of riskier projects; banks ration credit, rather than increase rates when there is excess demand. Banks are shown not to increase collateral as a means of allocating credit; although collateral may have incentivizing effects, it may have adverse selection effects. Equity, nonlinear payment schedules, and contingency contracts may be introduced and yet there still may be rationing. The law of supply and demand is thus a result generated by specific assumptions and is model specific; credit rationing does exist. (TNM)

13,126 citations


Journal ArticleDOI
TL;DR: In this paper, an extension of mean-variance portfolio theory is presented, which shows how credit risks combine with other financial and business risks to determine total risk, and empirically evidence from lender surveys about risks shows that farmers' credit is positively correlated with changes in farm income.
Abstract: Credit risks are unanticipated variations in costs and availability of credit that arise from forces in financial markets or from lenders' responses to risks in agricultural markets and farmers' creditworthiness. An extension of mean-variance portfolio theory shows how credit risks combine with other financial and business risks to determine total risk. Empirical evidence from lender surveys about risks shows that farmers' credit is positively correlated with changes in farm income, although the correlation is stronger for capital credit than for operating credit, and that variability in fund availability from rural banks has contributed to high credit risks.

95 citations


Journal ArticleDOI
TL;DR: In this article, an extensive review of the history of credit unions and the institutional structure is found in the National Credit Union Administration, which provides background information on the structure of the industry.
Abstract: At year end 1979, there were 12,738 Federal and 4,769 state chartered federally insured credit unions in the United States. Their assets were $36.5 billion and $18.5 billion, respectively. The industry was the fastest growing of all financial intermediaries during the early to mid-1970s. Factors contributing to a growth rate of 18 percent from 1970 to 1978 were the absence of Regulation Q restrictions on CU dividend rates, tax exempt status of CUs, the advent of share insurance in 1970 and the impact of sponsor subsidies. However, during 1979, federal credit union savings grew by only 2.4%, which was more than 85% lower than in the preceding year and was the slowest annual growth rate on record. Indeed, since 1977, federal credit unions have gone from the fastest growing to the second slowest growing type of depository institution. The reason for the changes in credit unions will be discussed after this section which provides background information on the structure of the industry. That structure has, historically led to a reduction in risk. The basic components of that structure are common bond and sponsorship.' Common Bond Credit unions are unique financial depository institutions in that they are consumer cooperatives and are limited to serving the market for consumer credit and savings. Generally, these institutions cannot do business with the general public due to charter limitations based on serving a membership that is characterized by a common bond. The common bond is based on occupation, association or residence. The only exceptions are generally found under state law and apply to state chartered institutions. The common bond restriction on credit union membership is assumed to reduce the cost of gathering credit information, reducing bad debt losses and manifests * National Credit Union Administration. The views expressed herein are those of the authors and do not necessarily reflect those of the National Credit Union Administration. ' An extensive review of the history of credit unions and the institutional structure is found in

86 citations


Journal ArticleDOI
TL;DR: In this article, the authors consider the combination of reinvestment and market risks stemming from uncertain cash flows on a mortgage will be called "timing risk" in the remainder of this paper.
Abstract: of the instrument, giving rise to market risk and marketability risk, respectively. Residential mortgages are debt instruments with a peculiarly interesting set of characteristics compared to Treasury securities. Although a mortgagor may be contractually obligated to amortize his indebtedness over, say, 30 years, prepayments of principal are common. Moreover, some mortgagors prepay more quickly than others, so an investor cannot be certain that actual payments will correspond even to an expected accelerated amortization schedule. Thus, the investor bears both reinvestment risk (because the mortgage may be paid off faster than expected) and market and marketability risks (because the mortgage may be paid off slower than expected). The combination of reinvestment and market risks stemming from uncertain cash flows on a mortgage will be called "timing risk" in the remainder of this paper. There are differences between Treasury securities and mortgages other than timing risk. In general, a mortgage bears credit risk because the mortgagor may not make payments as promised and because the liquidated value of the collateral property may be less than the remaining principal balance if default occurs. Even when a mortgage is insured, as in the Federal Housing Administration (FHA) program, an investor suffers losses from default when his claim for the remaining principal is not satisfied promptly. To guard against such losses, an investor must evaluate each individual mortgage he buys. The cost of such investigation impairs secondary market transfers of mortgages, implying the instruments bear greater marketability risk relative to Treasury securities. Finally, the costs of servicing mortgages, that is, obtaining and recording the payments of interest and amortization of principal, are substantially greater than the costs of servicing an investment in Treasury securities. The presence of timing risk, credit risk, and

57 citations


Journal ArticleDOI
TL;DR: The authors developed a theoretically sound model of the effect on yield spreads of callability and test that specification within the context of a comprehensive empirical model of yield spreads first estimated by Cook and Hendershott [3] (henceforth, C-H).
Abstract: Most CORPORATE AND MANY government bond issues contain call provisions. Since both buyer and seller are concerned with the effect that the terms of call provisions ought to have on yields, considerable effort has been devoted to developing models of the relationship between yields and callability. Also of interest are the benefits from optimal designl and exercise of the call. In addition, researchers concerned with the impact on yields of credit risk, issue size, and other bond characteristics have had to make some provision in empirical models for callability. Generally, empirical models of the effect of callability have not controlled for the other factors determining yields. Neither have studies of other yield determinants attempted to construct sophisticated measures to represent callability. In this paper we develop a theoretically sound model of the effect on yield spreads of callability and test that specification within the context of a comprehensive empirical model of yield spreads first estimated by Cook and Hendershott [3] (henceforth, C-H). C-H provide for the effects of taxes, default risk, relative security supply, and, through a simple proxy, for callability. Substituting our more sophisticated measure of the effect of call, we are able to test our model against the

13 citations


Book ChapterDOI
01 Jan 1981
TL;DR: The credit structure for UK exports is provided in Table 3.1 in this article, where the authors provide an idea of the credit structure of UK exports, and Table 2.1 provides an overview of the UK export credit structure.
Abstract: The lengthy payment period built into overseas trade terms (sixty to ninety days being usual and longer terms quite common) and the leisurely approach principals and intermediaries often adopt to meeting even these protracted terms means that the international seller has to carry a major credit burden. Some idea of the credit structure for UK exports is provided in Table 3.1.