Bank Lending and Credit Rationing

Paper Session

Saturday, Jan. 7, 2017 12:30 PM – 2:15 PM

Sheraton Grand Chicago, Missouri
Hosted By: International Banking, Economics, and Finance Association
  • Chair: Scott Frame, Federal Reserve Bank of Atlanta

Some Borrowers Are More Equal than Others: Bank Funding Shocks and Credit Reallocation

Olivier De Jonghe
,
Tilburg University
Hans Dewachter
,
National Bank of Belgium
Klaas Mulier
,
Ghent University
Steven Ongena
,
University of Zurich
Glenn Schepens
,
European Central Bank

Abstract

This paper provides evidence on the domestic lending decisions made by banks facing a negative funding shock. Using bank-firm level credit data, we show that banks reallocate credit to (i) sectors where they have high sector presence, (ii) sectors in which they are heavily specialized, and (iii) low-risk firms. These reallocation effects are not only statistically but also economically significant. Furthermore, we provide insight in the timing of these reallocation decisions. Reallocation to sectors in which a bank has a high sector presence is almost instantaneous, while sector specialization starts playing a role four to five months after the shock.

Bad Times, Good Credit

Bo Becker
,
Stockholm School of Economics
Marieke Bos
,
Stockholm University
Kasper Roszbach
,
Sveriges Riksbank and University of Groningen

Abstract

Banks’ limited knowledge about borrowers’credit worthiness constitutes an important friction in credit
markets. Is this friction deeper in recessions, thereby contributing to cyclical swings in credit? Alternatively, is the depth of this friction reduced in recessions, as tough times reveal information about firm quality? We test these alternative hypotheses using internal ratings data from a large, Swedish bank. This banks’ ability to sort borrowers by credit quality is best in recessions, and worst in good times. Our results suggest that information frictions are countercyclical in corporate credit markets.

Finance and Inequality: The Distributional Impacts of Bank Credit Rationing

M. Ali Choudhary
,
Bank of Pakistan
Anil K. Jain
,
Federal Reserve Board

Abstract

We analyze how, whom and why banks reduce credit using a natural experiment where massive flooding disproportionately impacted banks with differing exposures to certain geographic areas in Pakistan. Using a unique dataset that covers the universe of all consumer bank loans in Pakistan and this exogenous shock to bank funding, we find three key empirical results. First, banks ration credit following an increase in their funding costs. Second, banks disproportionately reduce credit to new and less educated borrowers. Third, the reduction in credit is not compensated by more aggregate lending by the less affected banks. The empirical evidence suggests that adverse selection is the leading cause for why banks disproportionately reduce lending to new borrowers. Our results suggest that during periods of bank distress, the poorest individuals may become the most financially vulnerable.

Covenant Violations, Collateral and Access to Funding: Public and Private Firms

Irina Barakova
,
Office of the Comptroller of the Currency
Mohammad Hasan
,
Office of the Comptroller of the Currency
Harini Parthasarathy
,
Office of the Comptroller of the Currency

Abstract

We study the impact of covenant violations on credit access for both privately-held and publicly-traded firms, using a rich supervisory dataset of syndicated loans from 2006-2012. Leveraging the unique information on covenant compliance, collateral and default risk in the data, we show that banks are substantially less likely to forgive covenant violations by private firms. Hence private firms, particularly firms with assets below $1 billion, experience more severe credit access consequences after violations relative to comparable public firms. These private firms are more likely to suffer loan limit cuts and balance reductions. Recessions aggravate these credit constraints due to increased violations and tighter lending standards. Private firms that are established in the loan market or have an external rating face smaller cuts. We also find that collateral plays an important role in alleviating credit rationing for private firms after violations, with over-collateralized loans experiencing much smaller cuts. Our results shed new light on how access to the public markets can influence bank intermediation, and the financing constraints faced by firms.
Discussant(s)
Gregory F. Udell
,
Indiana University
John V. Duca
,
Federal Reserve Bank of Dallas and Southern Methodist University
Richard Rosen
,
Federal Reserve Bank of Chicago
Stephane H. Verani
,
Federal Reserve Board
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • G2 - Financial Institutions and Services