Showing papers on "Credit risk published in 2017"

How Media Coverage of Corporate Social Irresponsibility Increases Financial Risk

Abstract: Research summary: This article explores the relationship between corporate social irresponsibility (CSI) and financial risk. We posit that media coverage of CSI generates risk by providing conditions that increase the potential for stakeholder sanctions. Through analyzing an international panel of 539 firms during 2008–2013, we find that firms receiving higher CSI coverage face higher financial risk. We show that the reach of the reporting media outlet is a critical condition for this relationship. Once the outlet has a high reach, the severity of CSI coverage is a boundary condition that further reinforces the effect. Our findings complement existing theory about the risk-mitigating effect of corporate social responsibility by illuminating the risk-generating effect of CSI coverage. For executives, these insights suggest complementary strategies for corporate risk management. Managerial summary: This article examines the effect of negative news on financial risk. It shows that negative media articles regarding environmental, social, and governance (ESG) issues increase a firm's credit risk. It also provides a detailed analysis of the impact of an article's reach and severity, i.e., how many readers are exposed to the article and how harshly it criticizes the firm. The results allow to quantitatively assess the risk that emanates from negative ESG news. For executives, three strategies are derived for limiting a firm's exposure to this risk: balancing corporate social responsibility programs with operational safety programs, reporting suboptimal environmental and social performance transparently and proactively, and avoiding acquisition targets and markets with a legacy of negative news. Copyright © 2017 John Wiley & Sons, Ltd.

Deviations from Covered Interest Rate Parity

Abstract: We find that deviations from the covered interest rate parity condition (CIP) imply large, persistent, and systematic arbitrage opportunities in one of the largest asset markets in the world Contrary to the common view, these deviations for major currencies are not explained away by credit risk or transaction costs They are particularly strong for forward contracts that appear on the banks' balance sheets at the end of the quarter, pointing to a causal effect of banking regulation on asset prices The CIP deviations also appear significantly correlated with other fixed-income spreads and with nominal interest rates

Mind the Gap: Disentangling Credit and Liquidity in Risk Spreads

Abstract: Wide and volatile interest rate spreads in the 2007-2009 financial crisis could represent concerns over asset liquidity or issuer solvency. To precisely identify the contribution of these two effects on sovereign bond and interbank spreads, I propose a model-free measure of euro-area market liquidity, and a measure of near-term interbank default risk. I find that credit and liquidity are independently important. In interbank risk spreads, the role of liquidity dominates, while the importance in sovereign bond yield spreads varies substantially by country and maturity. To better understand the liquidity channel that is captured by the new liquidity measure, but is understated by extant measures, I test the pricing of liquidity risk; the possibility that liquidity could be negatively correlated with marginal utility. I exploit the variation in returns over countries, maturities and time, and find that liquidity euro-area sovereign bond risk premia are large and significant.

Developing by borrowing? Inter-jurisdictional competition, land finance and local debt accumulation in China

Abstract: Although the investment-oriented development model for economic growth adopted by Chinese governments has generated spectacular results, the risks of debt-financed urbanisation and economic development have recently become evident in mounting local debts that are undermining the financial system, triggering concerns with respect to local governments’ indebtedness, financial stability and sovereign risk in China. In this paper, we portray the uneven spatial and temporal dynamics of local government debt in China, and examine the ways in which it is intertwined with institutional, political and economic factors. Our analysis shows that while global and national economic conditions have resulted in a dramatic increase in local government debt, particularly in the late 2000s and the early 2010s, the spatial variation of local debt accumulation in China could be partly explained by two institutional factors: land finance and inter-jurisdictional competition. We argue that the behaviour of local governments may...

Managerial Ability and Credit Risk Assessment

Abstract: Research on the credit rating process has primarily focused on how rating agencies incorporate firm characteristics into their rating opinions. We contribute to this literature by examining the impact of managerial ability on the credit rating process. Given debt market participants' interest in assessing default risk, we begin by documenting that higher managerial ability is associated with lower variability in future earnings and stock returns. We then show that higher managerial ability is associated with higher credit ratings i.e., lower assessments of credit risk. To provide more direct identification of the impact of managerial ability, we examine chief executive officer CEO replacements and document that ratings increase decrease when CEOs are replaced with more less able CEOs. Finally, we show that managerial ability also has capital market implications by documenting that managerial ability is associated with bond offering credit spreads. Collectively, our evidence suggests that managerial ability is an important factor that bond market participants impound into their assessments of firm credit risk. This paper was accepted by Mary Barth, accounting.

Extreme learning machines for credit scoring: An empirical evaluation

Abstract: Classification algorithms are used in many domains to extract information from data, predict the entry probability of events of interest, and, eventually, support decision making. This paper explores the potential of extreme learning machines (ELM), a recently proposed type of artificial neural network, for consumer credit risk management. ELM possess some interesting properties, which might enable them to improve the quality of model-based decision support. To test this, we empirically compare ELM to established scoring techniques according to three performance criteria: ease of use, resource consumption, and predictive accuracy. The mathematical roots of ELM suggest that they are especially suitable as a base model within ensemble classifiers. Therefore, to obtain a holistic picture of their potential, we assess ELM in isolation and in conjunction with different ensemble frameworks. The empirical results confirm the conceptual advantages of ELM and indicate that they are a valuable alternative to other credit risk modelling methods.

The effect of credit risk management on financial performance of the Jordanian commercial banks

Abstract: This research aims at examining the effect of credit risk management on financial performance of the Jordanian commercial banks during the period (2005-2013), thirteen commercial banks have been chosen to express on the whole Jordanian commercial banks. Two mathematical models have been designed to measure this relationship, the research revealed that the credit risk management effects on financial performance of the Jordanian commercial banks as measured by ROA and ROE. The research further concludes that the credit risk management indicators considered in this research have a significant effect on financial performance of the Jordanian commercial banks. Based on findings, the researcher recommends banks to improve their credit risk management to achieve more profits, in that banks should take into consideration, the indicators of Non-performing loans/Gross loans, Provision for facilities loss/Net facilities and the leverage ratio that were found significant in determining credit risk management. Also, banks should establish adequate credit risk management policies by imposing strict credit estimation before granting loans to customers, and banks in designing an effective credit risk management system, need to establish a suitable credit risk environment; operating under a sound credit granting process, maintaining an appropriate credit administration that involves monitoring, processing as well as enough controls over credit risk, and banks need to put and devise strategies that will not only limit the banks exposition to credit risk but will develop performance and competitiveness of the banks.

Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans

Abstract: Using a data set that records banks’ ongoing requests of information from small commercial borrowers, we examine when banks use financial statements to monitor borrowers after loan origination. We find that banks request financial statements for half the loans and this variation is related to borrower credit risk, relationship length, collateral, and the provision of business tax returns, but in complex ways. The relation between borrower risk and financial statement requests has an inverted U-shape; and tax returns can be both substitutes and complements to financial statements, conditional on borrower characteristics and the degree of bank–borrower information asymmetry. Frequent financial reporting is used to monitor collateral, but only for non–real estate loans and only when the collateral is easily accessible to lenders. Collectively, our results provide novel evidence of a fundamental information demand for financial reporting in monitoring small commercial borrowers and a specific channel through which banks fulfill their role as delegated monitors.

Evaluating borrower’s default risk in peer-to-peer lending: evidence from a lending platform in China

Abstract: Recent years have witnessed the popularity of online peer-to-peer lending, which allows individuals to borrow from and lend to each other on an Internet-based platform. Using data from a large P2P ...

Credit Ratings and Credit Risk: Is One Measure Enough?

Abstract: This paper investigates the information in corporate credit ratings. If ratings are to be informative indicators of credit risk, they must reflect what a risk-averse investor cares about: both raw ...

Municipal Bond Liquidity and Default Risk

Abstract: This paper examines the pricing of municipal bonds. I use three distinct, complementary approaches to decompose municipal bond spreads into default and liquidity components, and find that default risk accounts for 74% to 84% of the average spread after adjusting for tax-exempt status. The first approach estimates the liquidity component using transaction data, the second measures the default component with credit default swap data, and the third is a quasi-natural experiment that estimates changes in default risk around pre-refunding events. The price of default risk is high given the rare incidence of municipal default and implies a high risk premium.

The profitability of Chinese banks: impacts of risk, competition and efficiency

Abstract: This study aims to test the impacts of risk-taking behaviour, competition and cost efficiency on bank profitability in China.,A two-step generalized method of moments system estimator is used to examine the impacts of risk, competition and cost efficiency on profitability of a sample of Chinese commercial banks over the period 2003-2013.,The paper finds that credit risk, liquidity risk, capital risk, security risk and insolvency risk significantly influence the profitability of Chinese commercial banks. To be more specific, credit risk is significantly and negatively related to bank profitability; liquidity risk is significantly and positively related to return on assets (ROA) and net interest margin (NIM) but negatively related to return on equity (ROE); capital risk has a significant and negative impact on ROA and NIM but a positive impact on ROE; there is a significant and negative impact of security risk on bank profitability (ROA and NIM). It is found that Chinese commercial banks with higher levels of insolvency risk have higher profitability (ROA and ROE). Finally, higher competition leads to lower profitability in the Chinese banking industry, and Chinese commercial banks with higher levels of cost efficiency have lower ROA. In other words, the structure–conduct–performance paradigm rather than the efficient–structure paradigm holds in the Chinese banking industry.,This is the first paper to investigate the impact of different types of risk, including credit risk, liquidity risk, capital risk, security risk and insolvency risk, on bank profitability. This is the first study which uses more accurate measurements of efficiency and competition compared to previous Chinese banking profitability literature and which tests their impact on bank profitability. The findings not only provide a general picture on the risk, efficiency and competition conditions in the Chinese banking industry, but also give valuable information to the Chinese Government and to the banking regulatory authorities to make relevant policies.

Comparison of individual, ensemble and integrated ensemble machine learning methods to predict China’s SME credit risk in supply chain finance

Abstract: Supply chain finance (SCF) becomes more important for small- and medium-sized enterprises (SMEs) due to global credit crunch, supply chain financing woes and tightening credit criteria for corporate lending. Currently, predicting SME credit risk is significant for guaranteeing SCF in smooth operation. In this paper, we apply six methods, i.e., one individual machine learning (IML, i.e., decision tree) method, three ensemble machine learning methods [EML, i.e., bagging, boosting, and random subspace (RS)], and two integrated ensemble machine learning methods (IEML, i.e., RS–boosting and multi-boosting), to predict SMEs credit risk in SCF and compare the effectiveness and feasibility of six methods. In the experiment, we choose the quarterly financial and non-financial data of 48 listed SMEs from Small and Medium Enterprise Board of Shenzhen Stock Exchange, six listed core enterprises (CEs) from Shanghai Stock Exchange and three listed CEs from Shenzhen Stock Exchange during the period of 2012–2013 as the empirical samples. Experimental results reveal that the IEML methods acquire better performance than IML and EML method. In particular, RS–boosting is the best method to predict SMEs credit risk among six methods.

Credit Ratings and the Cost of Municipal Financing

Abstract: Moody’s recalibrated its municipal bond rating scale in 2010, upgrading $2.2 trillion of municipal debt. This event allows us to test whether investors rely on ratings to assess credit risk, free from confounding regulatory effects and changing fundamentals. We find the upgrades lowered credit spreads and expanded municipal debt capacity. These effects are stronger among more opaque issuers. We conclude that rating agencies will remain relevant despite legislators’ efforts to reduce regulatory reliance on ratings. Our results further commend improved disclosure to mitigate mechanistic reliance on ratings and inefficiencies due to rating standards that vary across asset classes.

Lending Implications of U.S. Bank Stress Tests: Costs or Benefits?

Abstract: The U.S. bank stress tests aim to improve financial system stability. However, they may also affect bank credit supply. We formulate and test opposing hypotheses about these effects. Our findings are consistent with the Risk Management Hypothesis, under which stress-tested banks reduce credit supply – particularly to relatively risky borrowers – to decrease their credit risk. The findings do not support the Moral Hazard Hypothesis, in which these banks expand credit supply – particularly to relatively risky borrowers that pay high spreads – increasing their risk. Results are generally stronger for safer banks, banks that passed the stress tests, and the earlier stress tests.

Unemployment Insurance as a Housing Market Stabilizer

Abstract: This paper studies the impact of unemployment insurance (UI) on consumer credit markets. Exploiting heterogeneity in UI generosity across U.S. states and over time, we find that UI helps the unemployed avoid defaulting on their mortgage debt. We estimate that UI expansions during the Great Recession prevented about 1.4 million foreclosures. Lenders respond to this decline in default risk by expanding credit access and reducing interest rates for low-income households at risk of being laid off. Our findings call attention to two benefits of unemployment insurance not previously highlighted: reducing deadweight losses from loan default and expanding access to credit.

Time to default in credit scoring using survival analysis: a benchmark study

Abstract: We investigate the performance of various survival analysis techniques applied to ten actual credit data sets from Belgian and UK financial institutions. In the comparison we consider classical survival analysis techniques, namely the accelerated failure time models and Cox proportional hazards regression models, as well as Cox proportional hazards regression models with splines in the hazard function. Mixture cure models for single and multiple events were more recently introduced in the credit risk context. The performance of these models is evaluated using both a statistical evaluation and an economic approach through the use of annuity theory. It is found that spline-based methods and the single event mixture cure model perform well in the credit risk context.

Managerial Ability and Credit Ratings

Abstract: We test whether credit rating analysts consider managerial ability as a credit risk factor and find that higher-ability managers obtain more favorable credit ratings. Controlling for past performance, these results suggest that managerial ability is itself a significant credit rating factor. Cross-sectional analyses indicate that managerial ability is beneficial specifically in firms facing financial or competitive pressure. We find that high-ability managers mitigate the adverse impact on ratings of other credit risk factors including negative earnings and low interest coverage. Our results contribute to a growing literature documenting economic benefits to hiring and retaining high-quality management. This article is protected by copyright. All rights reserved.

The effect of banking and insurance on the growth of capital and output

Abstract: Among emerging market economies, we observe countries that are rich in natural resources or blessed with high savings rates, yet with unimpressive economic growth rates. This fact points to the now widely accepted premise that capital itself is insufficient for economic growth. Institutions and environmental conditions that affect resource allocation appear also to be critical factors. If developing countries fail to create favorable conditions or to promote institutions that permit resources to flow to projects and industries promising the highest social return, their growth potential will be unrealized. Development theory, consequently, is today according greater attention to institutions that promote more efficient allocations of production factors. Financial intermediaries are widely credited with improving resource allocation. Banks and insurers help mobilize and allocate savings, monitor investment projects and credit risk, and mitigate the negative consequences that random shocks can have on capital investment. The roles of these two types of financial intermediaries over different stages of growth, however, are poorly understood.

Method for constructing financial asset trading system based on alliance chain

Abstract: The invention discloses a method for constructing a financial asset trading system based on an alliance chain With an alliance chain as a technical support, a novel financial asset digital unique certificate is provided based on the existing laws and regulations The system uses a distributed technology architecture All participants jointly maintain the ledger of financial asset trading It is ensured that the trading of financial assets is open, transparent, real and credible The credit risk of trading is reduced The cross-platform and cross-region flow of financial assets is promoted Tedious manual account checking work between platforms is omitted In addition, the block chain technology is applied to the field of financial asset trading for the first time A unified and standardized financial asset trading platform is established Digital management of financial assets is realized The credit risk of trading can be prevented effectively The efficiency of trading and supervising is improved The trading cost is reduced

Does access to credit improve household welfare? Evidence from Ethiopia using endogenous regime switching regression

Abstract: Purpose The purpose of this paper is to investigate how credit access affects the welfare of households and sheds light on how household characteristics influence the decision to take credit and the efficiency in credit use. Design/methodology/approach This study uses data from the fourth round of the Ethiopian Rural Household Survey conducted in 2009, and examines factors that determine the decision to take credit and the effect of such decision on household welfare. The household welfare variable is measured by the food security indicator and total food expenditure. The study employs endogenous Regime Switching model to account for endogeneity in access to credit and self-selection bias in the decision to participate in credit. Findings The result from the kernel distribution shows households with access to credit have more consumption expenditure than those without access to credit. The ordinary least square regression shows that access to credit increases total consumption by 12 percent without considering self-selection bias. Participation in non-farm activity increases the demand for credit by 17 percent. Land holding, household size, and participation in saving associations increase the probability of getting credit by 5, 11, and 20 percent, respectively. Access to credit appears to have a positive impact on food security in both actual and counterfactual cases for the current credit receivers. Originality/value This study provides a thorough analysis of the impacts of access to credit on household welfare in Ethiopia. The study contributes to the debate on the link between access to credit and household welfare and provides valuable input for policy makers.

Credit Default Swaps and Managers’ Voluntary Disclosure

Abstract: We investigate how the availability of traded credit default swaps (CDSs) affects the referenced firms’ voluntary disclosure choices. CDSs enable lenders to hedge their credit risk exposure, weakening their incentives to monitor borrowers. We predict that reduced lender monitoring in turn leads shareholders to intensify their monitoring and demand increased voluntary disclosure from managers. Consistent with this expectation, we find that managers are more likely to issue earnings forecasts and forecast more frequently when traded CDSs reference their firms. We further find a stronger impact of CDS availability on firm disclosure when (1) lenders have higher ability and propensity to hedge credit risk using CDSs, and (2) lender monitoring incentives and monitoring strength are weaker. Consistent with an increase in shareholder demand for public information disclosure induced by a reduction in lender monitoring, we find a stronger effect of CDSs on voluntary disclosure for firms with higher institutional ownership and stronger corporate governance. Overall, our findings suggest that firms with traded CDS contracts enhance their voluntary disclosure to offset the effect of reduced monitoring by CDS‐protected lenders.