Earnings performance of major customers and bank loan contracting with suppliers

Using a sample of 3725 loan facility–years for supplier firms that have financial data on their major customers during the period 1995–2011, this study investigates whether the earnings performance of major customers has effect on the price and nonprice terms of loans to the supplier firms. We find that various contracting terms are more favorable for loans to supplier firms whose major customers have higher return on assets (ROA). More importantly, we find that the effect of major customers’ earning performance on loan contracting terms is weaker for the borrowers with prior loan relationships with banks, while it is stronger for the borrowers that are highly dependent on their major customers. Our results suggest that banks take into account major customers’ earnings performance when contracting with their supplier firms, and the informativeness of customer earnings varies with the nature and strength of the customer–supplier relationships.     

A structural equation modelling of the antecedents of relationship quality in the Malaysia banking sector

The intense competition among firms in the new global environment has made it inevitable for firms to seek ways to create and maintain quality relationship with customers, and Malaysia banks are no exception. However, little is understood from empirical viewpoint about the antecedents of relationship quality specifically, the actual influence of overall customer satisfaction and its indicators. Based on data collected from 220 customers of 15 retail banks in Malaysia and analysed using the structural equation modelling technique, findings are that overall customer satisfaction is a key determinant of relationship quality. The indicators of customer satisfaction include trust, commitment, communication, service quality, service satisfaction and conflict handling. These results are not confounded by any service differential among the participating banks. Important theoretical and managerial implications of the findings are discussed.     

Foreign currency borrowing by small firms in emerging markets: When domestic banks intermediate dollars

This paper investigates what induces small firms in an emerging market economy to borrow dollar credit from domestic banks. Our data are from a unique survey of firms in Lebanon. The findings complement studies of large firms with foreign currency loans from foreign lenders. Exporters, naturally hedged against currency risk, are more likely to incur dollar debt. Firms also partly hedge themselves by passing currency risk to customers and suppliers. Less opaque firms with easily verifiable collateral and higher net worth are more likely to access dollar credit. Firms reliant on formal financing (banks and supplier credit) are more likely to contract dollar debt than firms reliant on informal financing (family, friends and moneylenders). Bank relationships, however, do not increase the dollar debt likelihood. And finally, profitable firms are less likely to have dollar debt. Information frictions and limited collateral, therefore, constrain dollar credit even when it is intermediated domestically.     

Is There a Difference Between Solicited and Unsolicited Bank Ratings and, If So, Why?

This paper analyses the effect of soliciting a rating on the actual outcome of bank ratings. Using two sample banks (one rated by Fitch and one rated by S&P), I find evidence that unsolicited ratings tend to be lower than solicited ones, after accounting for differences in observable bank characteristics. This downward bias does not seem to be explained by the fact that better-quality banks self-select into the solicited group. Rather, unsolicited ratings appear to be lower because they are based on public information and are therefore dependent on the quantity of public information disclosed by the banks. As a result, unsolicited ratings tend to be more conservative than solicited ratings, which incorporate both public and non-public information. While the latter result is also consistent with the fact that credit rating agencies may blackmail low-disclosure firms, the findings suggest that blackmailing—if it is actually used—is ineffective in making these firms start to pay for a rating.     

Can banks monitor small business borrowers effectively using hard information?

We investigate whether banks rely on hard information to monitor small business borrowers and to what extent hard information is credible. Using Japanese firm-level data, we show that banks reduce the amount of lending to defaulting firms if the firms are financially distressed and suffer operating losses. In contrast, banks do not significantly reduce the amount of lending to defaulting firms with low levels of leverage and high profitability. This implies that banks mitigate type II errors if they receive default signals using the hard information of informationally opaque small businesses.     

财政存款、银行竞争与僵尸企业形成

银行以优惠利率贷款为低质企业“输血”,是企业僵尸化的重要成因。然而,基于中国背景的文献,对银行“输血”动机的研究并不充分,本文从地方财政存款影响银行信贷分配的视角,分析僵尸企业形成的内在机理。首先,通过构建理论模型对银行竞争财政存款及影响企业融资和投资绩效进而僵尸化的逻辑进行刻画,而后依据省份财政存款、银行竞争与微观企业财务数据,对理论推论进行了验证。研究发现,财政存款占当地存款比重越大,企业僵尸化概率越高,并且银行竞争助长了企业僵尸化。此外,基于工具变量估计处理了核心变量的内生性问题,并进行了多种稳健性检验。机制检验表明,财政存款的信贷分配效应,促使企业过度投资,导致经营绩效恶化,进而提高了企业僵尸化概率,银行竞争则会加剧该效应。本文拓展了财政存款的经济效应与僵尸企业形成方面的文献,对于僵尸企业治理有一定参考意义。     

财政存款、银行竞争与僵尸企业形成

银行以优惠利率贷款为低质企业“输血”,是企业僵尸化的重要成因。然而,基于中国背景的文献,对银行“输血”动机的研究并不充分,本文从地方财政存款影响银行信贷分配的视角,分析僵尸企业形成的内在机理。首先,通过构建理论模型对银行竞争财政存款及影响企业融资和投资绩效进而僵尸化的逻辑进行刻画,而后依据省份财政存款、银行竞争与微观企业财务数据,对理论推论进行了验证。研究发现,财政存款占当地存款比重越大,企业僵尸化概率越高,并且银行竞争助长了企业僵尸化。此外,基于工具变量估计处理了核心变量的内生性问题,并进行了多种稳健性检验。机制检验表明,财政存款的信贷分配效应,促使企业过度投资,导致经营绩效恶化,进而提高了企业僵尸化概率,银行竞争则会加剧该效应。本文拓展了财政存款的经济效应与僵尸企业形成方面的文献,对于僵尸企业治理有一定参考意义。     

Vendor Financing

This paper shows that, even in the presence of a perfectly competitive banking industry, it is optimal for firms with market power to engage in vendor financing if credit customers have lower reservation prices than cash customers or if adverse selection makes it infeasible to write credit contracts that separate customers according to their credit risk. We analyze how the advantage of vendor financing depends on the relative size of the cash and credit markets, the heterogeneity of credit customers, and the number of firms in the industry.     

Changing banking relationships and client‐firm performance: Evidence from Japan for the 1990s

The extant literature generally suggests that the performance of client firms deteriorates if their distressed main bank reduces the supply of credit. However, this insight is only consistent with the notion that main banks have an information advantage over other banks to the extent that a client firm has trouble getting access to credit if the firm changes its main bank. This paper shows that Japanese firms did change their main banking relationship when their main banks become distressed in a period with financial shocks. Surprisingly, these firms did not suffer from loss of access to credit and actually their performance significantly improved after their change of main banks.     

Firms’ financial and real responses to credit supply shocks: Evidence from firm-bank relationships in Germany

We investigate the importance of firm-bank relationships for the international transmission of bank distress to the real economy. Using a large panel of matched financial statements of firms of all sizes and their relationship banks in Germany, we find that banks with losses from proprietary trading activities during the 2007/8 financial crisis decreased their lending, and that their firm customers responded by reducing real investment and employment. We document how different types of firms partially offset reduced credit supply by resorting to alternative financing sources.     

赶超战略与大银行垄断——基于新结构经济学的视角

改革开放初期,中国有很多资本高度密集的大型国有企业,需要大量资金维持生产运营,若无法获得足够的银行贷款以致资金链断裂而破产倒闭,极易引发动荡。本文研究发现,在当时中国资本稀缺的要素禀赋结构下,为确保“重要而不能倒”的国有企业获得足够的银行贷款而不破产倒闭,不适合采用放开银行准入以促使银行竞争的方式,反而应限制银行准入,控制银行数量。原因在于,放开银行准入增加的仅是中小银行,其资金动员能力有限,与国有企业的规模特性不相匹配,更重要的是,大量中小银行进入会分流大银行的存款,降低大银行的资金动员及服务国有企业的能力,导致国有企业的贷款成本和破产风险因此而上升。本文指出,一个国家的银行业结构内生于该国的经济发展战略。限制银行准入的政策安排通过在金融方面支持国有企业,在改革初期起到了维护国防安全、保障国计民生和维持社会经济稳定的作用,为平稳推动改革创造了条件。     

FinTech,BigTech, and the Future of Banks

Banks are unique financial institutions in that they combine the production of liquid claims—that is, demand deposits—with loans. Though banks can replicate most of what FinTech firms can do, FinTech firms benefit from an uneven playing field in that they are less regulated than banks. The uneven playing field enables nonbank FinTech firms to challenge banks in specific product areas where success is not tied to what makes banks unique—namely, their deposit‐gathering abilities and the potential for synergies with borrowers provided by deposits. And although banks’ responses to FinTech have also been hampered by their legacy IT systems and by internal frictions inherent in large diversified firms, FinTech's narrow product offerings and lack of established “franchises” appear to put clear limits on Fintech's ability to displace banks. Unlike Fintech, however, BigTech firms have some advantages that banks will find it harder to replicate, and so they present a much stronger challenge to established banks in two main areas: consumer finance and loans to small firms. And FinTech as well as BigTech are contributing to a trend in which banks are losing a comparative advantage that has derived from having more immediate access to information about parties seeking credit. The extent to which banks succeed in warding off such threats will depend on (1) their ability to make effective—and possibly even better—use of the same information technology now being used by its new competitors, and (2) their success in realizing economies of scale and scope that their nonbank competitors will find hard to match.     

Borrowers under water! Rare disasters,regional banks,and recovery lending

We show that local banks provide corporate recovery lending to firms affected by adverse regional macro shocks. Banks that reside in counties unaffected by the natural disaster that we specify as macro shock increase lending to firms inside affected counties by 3%. Firms domiciled in flooded counties, in turn, increase corporate borrowing by 16% if they are connected to banks in unaffected counties. We find no indication that recovery lending entails excessive risk-taking or rent-seeking. However, within the group of shock-exposed banks, those without access to geographically more diversified interbank markets exhibit more credit risk and less equity capital.     

Bank discrimination, holding bank ownership, and economic consequences: Evidence from China

This paper finds that compared with Chinese state-owned firms, non-state-owned firms have a greater propensity to hold significant ownership in commercial banks. These results are consistent with the notion that because non-state-owned firms are more likely to suffer bank discrimination for political reasons, they tend to address their financing disadvantages by building economic bonds with banks. We also find that among non-state-owned firms, those that hold significant bank ownership have lower interest expenses, and are less likely to increase cash holdings but more likely to obtain short-term loans when the government monetary policy is tight. These results suggest that the firms building economic bonds with banks can enjoy benefits such as lower financial expenses and better lending terms during difficult times. Finally, we find that non-state-owned firms with significant bank ownership have better operating performance. Overall, we find that firms can reduce discrimination through holding bank ownership.     

Why Do Banks Go Abroad?—Evidence from German Data

This paper provides empirical evidence on the determinants of foreign activities of German banks. We use regionally disaggregated panel data for the years 1981–98 and distinguish foreign direct investment from total foreign assets of domestic banks, of their foreign branches and of their subsidiaries. Foreign activities are found to be positively related to demand conditions on the local market, foreign activities of German firms, and the presence of financial centers. This supports the hypothesis that German banks follow their customers abroad. Exchange rate volatility has some negative impact. EU membership and the abolition of capital controls seem to have exerted a greater influence on foreign assets than on FDI of German banks, thus weakly supporting the hypothesis that the two are substitutes.     

Bargaining power and trade credit

This paper investigates how the supplier's bargaining power affects trade credit supply. We use a novel firm-level database of Chinese firms with unique information on the amount, terms, and payment history of trade credit extended to customers and detailed information on product market structure and clients-supplier relationships. We document that suppliers with weak bargaining power towards their customers are more likely to extend trade credit, have a larger share of goods sold on credit, and offer a longer payment period before imposing penalties. Important customers extend the payment period beyond what has been offered by their supplier and generate overdue payments. Furthermore, weak bargaining power suppliers are less likely to offer trade credit when credit-constrained by banks. Our findings suggest that suppliers use trade credit as a competitive device in the product market.     

A darker side to decentralized banks: Market power and credit rationing in SME lending

We use loan-level data to study how the organizational structure of banks impacts small business lending. We find that decentralized banks—where branch managers have greater autonomy over lending decisions—give larger loans to small firms and those with “soft information.” However, decentralized banks are also more responsive to their own competitive environment. They are more likely to expand credit when faced with competition but also cherry pick customers and restrict credit when they have market power. This “darker side” to decentralized banks in concentrated markets highlights that the level of local banking competition is key to determining which organizational structure provides better lending terms for small businesses.     

Trade credit and credit rationing

Asymmetric information between banks and firms can precludefinancing of valuable projects. Trade credit can alleviate thisproblem by incorporating the lending relation the private informationheld by suppliers about their customers. Incentive compatibilityconditions prevent collusion between two of the agents (e.g.,the buyer and the seller) against the third (e.g., the bank).Consistent with the empirical findings of Petersen and Rajan(1995), firms without relationships with banks resort more totrade credit, and sellers with greater ability to generate cashflows provide more trade credit. Finally small firms react tomonetary contractions by using trade credit, consistent withthe empirical results of Nilsen (1994).     

Bank image in the UAE: Comparing Islamic and conventional banks

This study investigates how bank customers in the UAE view Islamic banks versus conventional banks and whether this image affects customer loyalties or selection of a bank. We distributed a questionnaire to a convenient sample of UAE bank customers that focused on five areas: bank image, bank products, service quality, cultural aspects and religious factors, in addition to demographic attributes of the sample. The main findings of this study are: first, most UAE bank customers prefer banking with Islamic banks, although they are not satisfied with the quality of products and services; second, customers generally have a positive image of whatever bank they dealt with; third, the regression analysis results indicate that the most important factor in choosing a bank was bank products followed by service quality and then religious factors; fourth, there is a significant difference between how customers perceive UAE Islamic banks versus conventional banks; fifth, there is a significant difference in how customers perceive UAE Islamic banks based on their gender, education and duration of the relationship; and finally, there is a significant difference in how customers perceive UAE conventional banks based on their gender.     

Branching,scale economies,and banking costs

In this paper, we develop and estimate a model of bank costs based on a theory of the branch cost function. First, we show that convenient branch location is important to banking customers and implies that banks do not necessarily operate branches at minimum average cost. This theoretical result provides a rationale for including branch variables in the bank cost function. Second, we estimate a statistical cost equation derived explicitly from assumptions about the branch cost function and including branch output variables. Our empirical results suggest substantial economies of scale at the branch level, but no economies from expansion by branching. Finally, we show that the resulting cost structure of the banking industry does not imply that a highly concentrated banking structure is necessary for efficiency. Thus, economies of scale would not be expected to force small banks out of the market, even if current restrictions on interstate banking are liberalized.