Showing papers on "Credit risk published in 1990"

Credit markets in Northern Nigeria : credit as insurance in a rural economy

Abstract: This article addresses the issues of imcomplete markets and imperfect information in the context of credit markets in rural northern Nigeria. In much recent theoretical literature, the problems of moral hazard and adverse selection are assumed to be decisive for the organization of agrarian institutions. In contrast, it is found that in the four villages surveyed credit transactions take advantage of the free flow of information within rural communities. Information asymmetries between borrower and lender are unimportant, and their institutional consequences - the use of collateral and interlinked contracts - are absent. Credit transactions play a direct role in pooling risk between households through the use of contracts in which the repayment owed by the borrower depends on the realization of random production shocks by both the borrower and the lender.

Implications of credit constraints for risk behaviour in less developed economies

Abstract: DOES the capacity to absorb risk stem only from something innate-a psychological trait or preference structure? The purpose of this paper is to suggest that the ability to smooth out consumption over time, with one's own wealth or through access to consumption credit, may be an important determinant of risk-bearing capacity. We show that if individuals have identical risk preferences, those with access to greater amounts of consumption credit will have greater capacity to absorb risk. The above result does not have implications of much significance in economies characterized by capital markets so well developed that all individuals have access to adequate amounts of consumption credit. The same thing can be said of economies which have reached a level of affluence (and hence a level of individual savings) that makes borrowing for consumption purposes unnecessary. But the result does acquire significance in many less developed countries where the accumulated savings of the poorer segments of the society are entirely inadequate to prevent significant downswings in consumption in the bad states of nature. Moreover, the distribution of access to credit in less developed countries is notoriously skewed across the population. We assume that individuals are risk-averse. In the particular characterization of risk preferences which is appropriate to the intertemporal context, risk-averse individuals prefer a smooth consumption profile over time to an uneven one. An agent who is either wealthy or has considerable access to credit can disengage each period's consumption from the income realized in that period: when the income draw is poor he can either dissave or borrow, and when the draw is good he can either replenish his wealth or repay the debt. The capacity to bear risk, in this view, is derived from the ability to stabilize consumption over time. Put differently, the cost of risk to an individual can be reduced if he could pool risks over time. Wealth or access to capital enables him to do precisely this. Thus, even when all agents have identical risk preferences, differential risk behaviour would still obtain if the agents have differential access to capital. This paper formalizes the above idea. Two key features of our view are: (a) the essentially intertemporal nature of risk-bearing, and (b) the peculiarity of captial markets as manifest in differential access to credit across agents. The intertemporal nature of risk-bearing is eminently reasonable since, in reality, the effects of even a one-period gamble are spread out across several periods. Moreover, many important decisions under uncertainty entail sequences of gambles rather

Credit Controls: 1980

Abstract: Government price control programs in the U.S. began over two hundred years ago. More recently, credit controls, which are a special case of price controls, entered the arsenal of policy instruments. Credit control programs involve regulation of either the price of credit-interest rates-or the quantity of credit extended for various purposes. Credit controls can be selective or general. Selective controls affect the price or quantity of specific types of credit, whereas general controls are designed to affect the aggregate amount of credit used.

Pairwise Credit in Search Equilibrium

Abstract: Pairwise extension of credit is introduced into the barter-search economy previously analyzed by the author. The penalty for failure to repay a debt is modeled as the end of trading opportunities. Since credit availability makes access to trade more valuable, there may be multiple equilibrium credit limits. Since the credit limit affects the implicit interest rate and the stock of inventories, it is necessary to check the net impact of the credit limit on the incentive to repay. In a calculated example, with lumpy credit availability, multiple equilibria are very common with a greater credit limit associated with a lower implicit interest rate. With smooth credit availability no multiple equilibria were found. Surprisingly, credit can break the no-production equilibrium.

Growth, External Debt, and Sovereign Risk in a Small Open Economy

Abstract: An optimizing growth model for a highly indebted small open economy is constructed and analyzed. An important innovation in the model is the incorporation of sovereign risk through the specification of an upward-sloping foreign debt supply function. The model is used to examine the interaction between external debt and growth in response to various policies and exogenous disturbances. It is shown that structural policies intended to reduce the fiscal deficit or increase productivity can lead to trade-offs in their effect on capital accumulation and the stock of debt.

Inductive learning for risk classification

Abstract: The authors discuss the application of inductive learning to credit risk analysis. Three risk classification problems are addressed: business loan evaluation, bond rating, and bankruptcy prediction. The use of a system called Marble, a knowledge-based decision-support system that uses approximately 80 decision rules to evaluate commercial loans, is discussed. In particular, an aspect of Marble that uses inductive learning to classify financial risks is described, and the effectiveness of the technique is discussed. >

Sovereign Debt Ratings: A Judgmental Model Based on the Analytic Hierarchy Process

Abstract: The major rating agencies assign quality rating to international security offerings. These ratings serve as indicators of perceived sovereign risk associated with such offerings. A review of the ratings process followed by the major rating agencies (in particular, the Standard & Poor's Corporation) reveals that ratings are assigned with considerable reliance on informal judgment. Informal judgmental systems, however, can induce serious inconsistencies in the relative importance assigned to criteria used in assigning rating and lead to biased ratings. This paper presents a formal judgmental model for assigning sovereign debt ratings that avoids the potential inconsistencies of informal systems. Model use is illustrated by relying on descriptions of the ratings process published by Standard and Poor’s Corporation. While the model proposed in this paper provides a framework for the rating agencies to ensure consistency in their ratings process, we suggest a complementary relationship between multivariate statistical classification models typically used to assess economic and political risk and the proposed model which assigns country risk ratings.

The impact of sovereign risk on the market valuation of U.S. bank equities

Abstract: This paper tests whether the August 1982 advent of the Latin American debt crisis affected the implicit value of commercial bank loans to major Latin American debtors and hence, the value of equities. In contrast to previous studies, the analysis provides an explicit derivation of the theoretical impact of such an effect, uses a more efficient pooled cross-sectional, time-series estimating technique, addresses the question of whether (ex ante) required returns on bank equities also were affected, and compares the estimates to the behavior of the direct market for Latin American bonds. The results imply that the crisis did cause significant debt discounting as well as an increase in required returns. However, unlike the bond market, most of this equity effect was delayed 6–9 months.

Britain's best kept secret? An analysis of the credit union as an alternative source of credit

Abstract: At any time, the significance of a new device which facilitates saving and borrowing and encourages the prudent management of credit and debt is clear. Given the present credit market, in which certain categories of borrowers either cannot purchase credit or can only do so on disadvantageous terms, then the importance of such an alternative only increases. The credit union is such a device. It has an established and proven record of success in many countries but, outside of Northern Ireland, credit unions are in their infancy in the United Kingdom. This article examines the possibilities credit unions afford, against the background of the increasing problem of debt in the United Kingdom. We contend that credit unions can afford a partial solution to the debt problem, but that attention should also be placed on their limitations.

Determinants of Voluntary and Involuntary Bank Lending to Developing Countries in the 1980s

Abstract: The current confusion about commercial lending determinants appears to be mainly because conflicting hypotheses apply to different lending regimes. It is important to distinguish between credit constrained and nonconstrained borrowers, and between voluntary and involuntary lending. The empirical investigation focuses on whether or not banks have honored policy reform and favorable economic performance of debtors by providing additional financing. Furthermore, it is assessed in which way bank lending to developing countries has been influenced by sovereign risk since 1982. Copyright 1990 by WWZ and Helbing & Lichtenhahn Verlag AG

Credit: the consumer perspective

Abstract: The U.K. has seen a considerable expansion in the use of credit during the 1980s. Although the majority of consumers are able to manage their use of credit there are many whose borrowing leads to hardship. There are various ways in which the availability of credit can be controlled but there is a high degree of reluctance to do so, both on the part of government and the credit card companies. A mechanism for assessing credit worthiness and a properly resourced system for assisting those who experience difficulties through using credit is needed. The social and economic consequences for consumers of the overuse of credit cannot be underestimated.

A New Approach for Jointly Evaluating the "Six Cs" of Loan Analysis

Abstract: A New Approach For Jointly Evaluating The "Six Cs" of Loan Analysis(*) Most financial management textbooks discuss the five Cs of credit analysis--capacity, capital, character, collateral, and conditions--in relationship to the evaluation of a given firm's credit risk. A number of efforts have been undertaken to quantify and summarize two of these five Cs for the purpose of estimating the bankruptcy risk of firms: capacity and capital. Notable among these efforts are the Z-score model of Altman[2], the Zeta analysis model of Altman, Haldeman, and Narayanan[3], and the application of a discriminant analysis model to small businesses by Edmister[5]. In addition, a credit-scoring model was developed by Chesser[4] to determine the creditworthiness of a potential business loan customer. These above-mentioned quantitative models not only ignore the character, collateral, and conditions dimensions of credit risk analysis but also do not incorporate a measurement of expected return. In this paper, a flexible technique for quantifying and combining the five dimensions of credit analysis with a sixth C of loan evaluation, customer profitability analysis, is proposed. The purpose of this technique is to jointly evaluate the objective and subjective estimations of the six Cs in order to generate an overall indicator of the relative attractiveness of a given potential business loan. Loan attractiveness in this model is evaluated relative to the utility function of the financial institution's director loan committee. The indicator of loan attractiveness is intended to serve as supplemental information for the loan approval-disapproval decision-making process and can also be used by a loan or credit officer to help screen, evaluate, and possibly restructure potential deals prior to consuming loan committee time with the application. After proposing a hierarchical model of the business loan evaluation process in the next section, conjoint analysis--the quantitative technique that can be used to jointly analyze the six Cs--will be discussed. Then, a step-by-step approach for applying this technique at a given financial institution will be suggested. Concluding remarks are provided in the final section. A HIERARCHICAL MODEL OF THE BUSINESS LOAN EVALUATION PROCESS Table 1 contains a hierarchical model of the business loan evaluation process. Appendix A includes a description of the various credit risk- and expected customer profitability-related variables. The descriptions in Appendix A are purposely somewhat vague as far as the definitions of the various variables are concerned. Each financial institution that utilizes this technique has the opportunity to tailor the definitions to its unique situation. In reality, each financial institution might choose to adjust the definitions so that they mesh with the categories used for management or reporting purposes. It should be noticed in Table 1 that credit risk is assumed to be a function of four dimensions, while expected customer profitability is assumed to be a function of two dimensions. Conjoint analysis, the mathematical technique used to jointly analyze the individual credit risk and expected customer profitability dimensions, is reviewed in the next section. CONJOINT ANALYSIS The joint analysis of the six Cs is made possible through the use of conjoint analysis. Conjoint analysis is a measurement technique developed by researchers in the fields of mathematical psychology and psychometrics and commonly applied in marketing research[6]. It is concerned with the measurement of the joint effect of two or more independent variables on the ranking of a dependent variable. One of the most common applications of conjoint analysis is the measurement of the relative importance of consumer product attributes. Such information is especially useful in the design of new products or the redesign of existing products. As far as financial applications are concerned, the technique was used by Teas and Dellva[7] in order to measure consumer preferences of alternative financial services, by Zinkhan[9] to design security issues, and by Zinkhan and Zinkhan[10] to design financial services. …

A Study of the Operations and Performance of Selected Cooperative Credit Unions

Abstract: To provide an adequate understanding of what a credit cooperative is, in terms of operations and policies, financial performance and membership, this paper determines the effectiveness of credit cooperatives in meeting the needs of their members and where applicable, suggests ways and means to improve their services. It also identifies possible weaknesses in the management and operations.

Credit & savings for development

Abstract: Poor people in Third World countries often have no access to credit for either short-term needs or long-term investment in their small business enterprises. Even when credit is available, the high rates of interest charged may lead to permanent indebtedness. This book examines various methods of making credit available to poor people as part of a strategy of poverty alleviation. Often, credit can be generated from savings and different forms of credit and savings schemes are examined. The provision of credit is most effective when combined with advice and training as part of a comprehensive development initiative.

FIRREA: Controlling Savings and Loan Association Credit Risk Through Capital Standards and Asset Restrictions

Abstract: On August 9, 1989, President Bush signed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)' in an attempt both to resolve the current savings and loan association (S&L) crisis and to insure the future health of the S&L industry. F1RREA seeks to prevent a recurrence of the present crisis by both encouraging and forcing S&L's to reduce the riskiness of their asset portfolios.2 Through stricter capital requirements, FIRREA tries to create incentives for S&L owners and managers to adopt lower risk asset portfolio strategies. To supplement these new incentives, FIRREA attempts directly to limit the riskiness of S&L asset portfolios by imposing new limitations on the amount of certain high credit risk assets that an S&L may hold.

Interest Rate Swaps

Abstract: Here's complete coverage of the market movements, diverse applications, basic instruments, pricing and portfolio risk management, credit risk considerations, and regulatory, accounting, and taxation concerns of interest rate swaps from some of the most respected practioners and academics in the field.

A Multidimensional Model for Credit Decision Process in Commercial Banks

Abstract: A multidimensional model for credit decision process is developed. The model is based on the assumption that credit decision is a function of five variables; (a) financial analysis, (b) bank credit policy, (c) economic conditions, (d) legal aspects and international regulations of banks' transactions, and (e) credit analyst personal judgment. The major part of this paper is devoted to discussing the variables involved in the credit decision model. Then the model is presented to show the interaction of these variables and their effect on the credit decision.

International credit market connections

Abstract: Some test cases show how credit markets couple and decouple constantly, creating a complex web of international financial relationships.