Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)
- Chair: Justin Murfin, Cornell University
Disaster Lending: “Fair” Prices, but “Unfair” Access
AbstractWe find that under risk-insensitive loan pricing – a feature present in many government programs – marginal-credit-quality borrowers are less likely to receive credit. By restricting price flexibility, marginal applicants that would likely receive a loan at a higher interest rate are instead denied credit altogether. Our particular setting is the Small Business Administration’s disaster-relief home loan program. This program screens applicants on credit quality, but cannot price loans according to credit risk. We find that this program denies more loans in areas with larger shares of minorities, subprime borrowers, and higher income inequality, even relative to private-market denial rates. Thus, despite ensuring “fair” prices, risk-insensitive pricing may lead to “unfair” access to credit.
Why Are Commercial Loan Rates So Sticky? The Effect of Private Information on Loan Spreads
AbstractPast studies provide evidence that commercial loan spreads are "sticky," in the sense that they do not fully respond to changes in market rates or firm credit risk characteristics. In this paper, we provide evidence that stickiness arises, in part because bank screening based on private soft information varies with changes in credit risk. Our analysis demonstrates that stickiness in loan spreads does not necessarily indicate loan mispricing and may arise even in the absence of credit rationing, bank information monopolies, or behavioral biases in loan contracting.
- G2 - Financial Institutions and Services