Showing papers on "Credit risk published in 1983"

Usury Laws and Consumer Credit: A Note

Abstract: MUCH HAS BEEN WRITTEN on the potential effects of rate ceilings on consumer credit markets,1 and numerous empirical studies have analyzed the impact of rate ceilings on mortgage loans and housing construction markets.2 However, the actual effect of loan rate ceilings on consumer financial markets in general has not been well documented-in part because credit terms are complex so the credit offer function has several arguments. Notwithstanding the potential complexity of credit terms, it is usually assumed that if a rate ceiling reduces the nominal price of credit, P, the market will fail to clear, and excess credit demand will need to be rationed out of the market by adjusting credit terms other than the rate. In this context, most investigators assume, first, that the price of credit is solely a function of the interest rate, r, and second, that required credit rationing is conducted by suppliers who reject risky customers or alter credit terms to reduce risk. When credit obtained at the retail point-of-sale is considered, however, more options are available. In particular, the price of goods purchased with credit can be raised.3 Thus, a more general model of consumer credit would note that P = P(r, Pr) where Pr = the price premium on goods purchased with credit. Since funds are highly fungible, it is likely that consumers are able to substitute retail-originated credit for other sources of consumer credit at low cost. If portfolio adjustment costs were zero, a rate ceiling could have no effect on consumer's total indebtedness, as any decrease in r could be exactly offset by an increase in Pr at retail credit sources, so that P would remain unchanged. However, it is unlikely that all consumer credit needs can be met by obtaining retail credit so that consumer use of credit may be reduced by rate ceilings. This would occur if consumers bore adjustment costs (such as transportation costs), when they switched from cash to retail credit sources, that suppliers did not receive. The question then arises whether, when retail credit is available, adjust

Costly Information Production Equilibria in the Bank Credit Market with Applications to Credit Rationing

Abstract: In this paper, we explore the nature of equilibria in an asymmetrically informed bank credit market in which credit applicants know their own (intrinsic) default risks, but potential lenders can discover these default risks only by expending resources to produce information. The resolution of informational asymmetries in the capital market is, in the contemporary view, considered a very important function served by financial intermediaries like commercial banks and, in the opinion of some, even the primary justification for their existence [17]. We, therefore, focus on how the presence of asymmetric information—in particular, the response of (expected) profit-maximizing banks to it—affects the equilibrium prices and quantities of credit offered in the banking system.

A Programming Analysis of Farmers' Credit Risks

Abstract: A previous study by Barry, Baker, and Sanint (BBS) showed that credit reserves, valued by farmers as a response to risk, are themselves subject to risk. Their theoretical results, along with empirical evidence from lender surveys, indicated that the portfolio effects of credit risks are important and warrant further study. This paper shows the development and application of a multiperiod risk-programming model emphasizing the relationships between credit risks, business risks, and risk-efficient farm plans. A representative cotton-sorghum farm in south-central Texas is the basis for the empirical analysis. Results show that credit risks arising from lender's nonprice responses to changes in farm income may strongly influence a farm's risk-efficient financial organization, liquidity, and rate of growth for differences in risk aversion.

On the nature of credit demand and credit rationing in competitive credit markets

Abstract: Conventional analyses of the credit rationing problem seek to explain that problem within the context of classic demand analysis. In this paper we demonstrate that it is generally inappropriate to apply the notion of classic demand to credit markets, consequently, conventional notions of credit rationing must be rejected. In providing a new definition of credit rationing we also establish the previously rejected characterized by credit rationing.

Consumer Credit Analysis

Abstract: The last twenty years has seen a revolution in consumer credit, with more and more people borrowing on an increasing scale. The explosion in demand for consumer credit could probably not have been met successfully without the development of better and more efficient techniques for handling a key decision. This decision — whether or not to lend money to a prospective borrower — underpins all credit operations. The well‐being of a credit institution, and ultimately its survival, depends on the ability to make this fundamental lending decision correctly.

Assessing liquidity requirements of developing countries, 1984–6

Abstract: The recent spate of debt problems of certain, mainly developing, countries and the associated implications for the private commercial banking system, and, indeed, the international monetary system itself, has led many observers to conclude that action must be taken to ensure that a sufficient flow of finance to developing countries continues despite the increase in perceived sovereign risk whic unfolding events clearly imply. From Salomon Brothers' Henry Kaufman, to the Federal Reserve System's Paul Volcker, and the US Treasury's Donald Regan, there seems virtually unanimous agreement in the United States that urgent action is needed. The coercive actions of the Bank of England and the Deutsche Bundesbank in late 1982 clearly indicated the level of official concern in Europe also. Nor, despite more official 'discretion', is Japan ignoring the matter, several major Japanese banks having found themselves in the unfortunate position of high-risk 'johnnies-come-lately', particularly in Latin America. Yet the very necessity felt by the bankers to establish the Ditchley Institute* indicates the severity of the confusion and lack of information which surrounds the sovereign debt issue. It is the intention of this paper in some small measure to improve the inormation flow by setting out, in clearly defined terms, a possible scenario for the medium-run (1984-6) liquidity requirements of developing countries, and more particularly, their need for commercial bank credit. As will be seen, these needs are staggering. Even if the 47.5 per cent increase in IMF quotas (which in fact translates into about half that amount of 'usable' currencies ie, something in the region of $17 billion, once-and-for-all) and the extension of the General Arrangements to Borrow (GAB) both to include more potential beneficiaries and to increase its resources to $19 billion, come on stream as planned in 1984, there will still remain a vast need for net new medium-term commercial bank lending to developing countries, perhaps in the region of $250 billion or so in aggregate over the three years, to sustain even the extremely modest real GDP

Ldc credit risk and bank regulation

Abstract: Publisher Summary The risk in bank lending to developing countries must be seen against the background of events both as they affect the borrowing countries and the lending banks. This chapter explores some of the risks inherent in bank lending to largest developing countries and the appropriate regulatory reaction to any perception of mounting risk. Banks have correctly diagnosed that sovereign risk, that is, the risk of lending to foreign governments, is fundamentally different from commercial risk. However, they have not always drawn the right conclusions from this insight. Three types of risk, essentially, need to be considered in international lending: (1) commercial risk, (2) sovereign risk, and (3) country risk. Commercial risk refers to the possibility that an enterprise to which a loan has been made may be unable to service and repay. In the extreme case, the enterprise then goes out of business and the uncollected part of the loan must be written off. Sovereign risk refers to loans to a sovereign government that conceptually cannot go out of business. Country risk refers to the risk of a loan to a commercial borrower in a foreign country. It carries the risk both of failure of the borrower and of actions by the foreign government impeding loan performance by an otherwise solvent commercial borrower, for instance, by denying him access to foreign exchange. The chapter further discusses bank regulation to deal with these credit risks.