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Bank Lending Behavior

Paper Session

Sunday, Jan. 8, 2017 3:15 PM – 5:15 PM

Sheraton Grand Chicago, Chicago Ballroom IX
Hosted By: American Finance Association
  • Chair: Elena Loutskina, University of Virginia

Sequential Credit Markets

Ulf Axelson
,
London School of Economics and Political Science
Igor Makarov
,
London School of Economics and Political Science

Abstract

Entrepreneurs who seek financing for projects typically do so in decentralized markets where they need to approach investors sequentially. We study how well such sequential markets allocate resources when investors have valuable but dispersed information. The sequential nature of the market introduces endogenous adverse selection which prevents information from being fully aggregated and leads to substantial investment inefficiencies. Contrary to what is commonly believed, we show that when the application history of a borrower becomes observable, e.g., through a credit bureau, it leads to more adverse selection, quicker market break downs, and higher rents for investors. Nevertheless, a sequential search market with a credit bureau can be more efficient than a centralized exchange where excessive competition may impede information aggregation. We also show that investors who rely purely on hard information in their lending decisions can out-compete better informed investors with soft information, and an introduction of interest rate caps can increase the efficiency of the market.

The Economic Consequences of Borrower Information Sharing: Relationship Dynamics and Investment

Andrew Sutherland
,
Massachusetts Institute of Technology

Abstract

I use the introduction of a US commercial credit bureau to examine how credit relationships are affected by information sharing. My within firm- and lender-time tests exploit the fact that firms have ongoing relationships with multiple lenders that join the bureau in a staggered pattern. I find information sharing reduces relationship-switching costs, particularly for firms that are young, small, or have had no defaults. Information sharing shortens contract maturities in new relationships, and reduces lenders’ willingness to provide additional financing to their delinquent borrowers. My results highlight the mixed effects of transparency-improving financial technologies on credit access.

Loan Terms and Collateral: Evidence From the Bilateral Repo Market

Jun Kyung Auh
,
Georgetown University
Mattia Landoni
,
Southern Methodist University

Abstract

We study secured lending contracts using a novel, loan-by-loan database of bilateral repurchase agreements in which borrower quality is fixed and collateral quality is known. Holding all risk factors constant except collateral quality, we show that loans on riskier collateral have higher spreads, that is, they remain riskier even though lenders require higher margins. We also document that lower-quality loans have longer maturity, driven by borrower rollover concerns. Our results suggest that maturity is not lenders’ primary risk management tool. Holding loan quality constant (including collateral), we show that one point of spread substitutes for approximately 9 points of margin.

CDS and Credit: Testing the Small Bang Theory of the Financial Universe With Micro Data

Yalin Gunduz
,
German Federal Bank
Steven Ongena
,
University of Zurich
Gunseli Tumer-Alkan
,
VU University Amsterdam
Yuejuan Yu
,
Shandong University

Abstract

Does hedging motivate CDS trading and does that affect the availability of credit? To answer these questions we couple comprehensive bank-firm level CDS trading data from the Depository Trust and Clearing Corporation with the German credit register containing bilateral bank-firm credit exposures. We find that following the Small Bang in the European CDS market, extant credit relationships with riskier firms increase banks’ CDS trading and hedging of these firms. Holding more CDS contracts of safer firms leads banks to supply relatively more credit to them. Only if banks were properly hedged before the Small Bang they take more risk.
Discussant(s)
Anjan Thakor
,
Washington University-St. Louis
Justin Murfin
,
Yale University
Erik Gilje
,
University of Pennsylvania
Martin Oehmke
,
Columbia University
JEL Classifications
  • G2 - Financial Institutions and Services