Real Effects of Lending Arrangements
Saturday, Jan. 5, 2019 8:00 AM - 10:00 AM
- Chair: John V. Duca, Oberlin College
Financial Access Under the Microscope
AbstractWe examine the impact of a large-scale microcredit expansion program on financial access and the transition of previously unbanked borrowers to commercial banks. Administrative data on the universe of loans to individuals show that the program improved access to credit, especially in underdeveloped areas. A sizeable share of first-time borrowers who need a second loan switch from microfinance institutions to commercial banks, which cream-skim low-risk borrowers and grant them larger, cheaper, and longer-term loans. These borrowers are not riskier than those already at commercial banks. The microfinance sector, together with well-functioning credit reference bureaus, help mitigate information frictions in credit markets.
To Ask or Not To Ask? Collateral Versus Screening in Lending Relationships
AbstractUsing a comprehensive loan-level dataset, we study the impact of bank-firm relationships on collateral requirements both at the beginning of a relationship and over time. First, we exploit the EBA capital exercise, a quasi-natural shock that required increased capital requirements for a number of banking groups in the European Union. This experiment ceteris paribus makes secured lending cheaper vis-`a-vis unsecured lending for the affected banks, since secured loans require less regulatory capital. We find that relative to the control group, the affected banks engaged in more collateralized lending. However, we further find this effect is less pronounced for relationship borrowers. Second, extending the analysis to span nine years of data, we document that to loyal borrowers with long relationship potential, the bank is more likely to offer unsecured credit at the beginning of the relationship, complementing existing evidence that collateral requirements decline over the course of the relationship. The results suggest that relationship banking is important for alleviating credit access - both during hard times for banks, as well as at the beginning of borrowers' lives - especially for small, collateral-constrained businesses.
The Double-Edged Sword of Global Integration: Robustness, Fragility & Contagion in the International Firm Network
AbstractWe use daily equity returns to estimate global inter-firm networks across all major industries from 1981-2016 and test whether the network exhibits robust (beneficial) or fragile (harmful) behavior, relating multinational firms' overall health with global integration. More connected firms are less likely to be in distress and have higher profit growth and equity returns, but are also more exposed to direct contagion from distressed neighboring firms and network level crises. Our machine learning based analysis reveals the centrality of finance in the international firm network and increased globalization over time, with greater potential for crises to spread globally when they do occur.
- G2 - Financial Institutions and Services
- E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy