The Pricing of Sequential Bank Loans

The theory of financial intermediation assigns banks a unique role in the resolution of information asymmetry. Banks, in general, obtain private information about the borrower and the project during the screening of loan applicants and during the monitoring of loan recipients. Incumbent banks, in particular, utilize information obtained while monitoring previous loan extensions to resolve information asymmetry when granting subsequent loans. We examine the rate on a sequence of loans to a borrower and find that the incumbent bank information advantage has finite magnitude and is quickly reflected in the pricing of the second loan. We also find that the lending relationship does not deteriorate to the detriment of the borrower. This study also provides further evidence supporting the hypothesis that an incumbent bank resolves information asymmetry during the monitoring of loan extensions.     

Bank Competition and Loan Quality

We analyze the impact of bank competition on the equilibrium quality of loans in a formal model where banks do not observe the type of loan applicants, i.e. face an adverse selection problem, nor borrowers’ effort, i.e. also face a moral hazard problem. The main finding is that there exists an inverted U-shaped relationship between competition and the average quality of loans. Policy implications are derived from this result and from an extension to the basic model where banks may sequentially acquire information about potential borrowers.     

How changes in market conditions affect screening activity,credit risk,and the lending behaviour of banks

The global financial crisis dramatically transformed the market conditions in the banking industry. We construct a theoretical model of spatial competition that considers the differential information between lenders and loan applicants to explore how changes in the market structure affect the lending behaviour of banks and their incentives to invest in screening and how this, in turn, affects the level of credit risk in the economy. Our findings reveal that enhanced competition reduces lending cost thus encouraging the entry of new customers in credit markets. Also, that the transportation cost that loan applicants are required to pay to reach the bank of their interest shrinks with respect to the degree of competition. We further lend support to the view that stiffer competition has an increasing impact on the level of credit risk. Notably, we find that competition strengthens the incentives of banks to engage in screening activity and that screening serves as a protection mechanism that can provide banks with a shield against bad loans. Overall, when market conditions are substantially distorted, this has a dilutive impact on the incentives mechanism of banks to screen their applicants. We provide empirical evidence which is consistent with the conceptual underpinnings of our theoretical model and the obtained findings.     

Learning by lending

This paper studies bank learning through repeated interactions with borrowers from a new perspective. To understand learning by lending, we adapt a methodology from labor economics to analyze how loan contract terms evolve as banks acquire new information about borrowers. We construct “proxy” variables for this information using data from borrowers’ out-of-sample, future credit performance. Due to the timing of their construction, banks could not have used these variables directly to price loans. We nonetheless find that these proxies increasingly predict loan prices as relationships progress, even after controlling for possible omitted variable bias. Our methodology provides strong evidence that: (a) bank learning affects loan prices, and (b) relationship benefits are heterogeneous. In particular, higher quality borrowers face differentially lower spreads as their relationship with lenders develop – and banks learn about their quality – while lower quality borrowers see loan prices increase and their loan amounts fall. We further find suggestive evidence that banks incorporate CEO-specific information into loan prices.     

Depositor market discipline: New evidence from selling failed banks

This paper studies depositor behavior following the acquisition of failed banks by healthy banks in FDIC-supervised transactions. Using a US bank branch-based dataset spanning 2007 to 2014 we find that failed bank depositors discipline acquiring banks post-resolution. This appears to be related to features of the acquiring banks' asset quality and loan composition, but it may also be linked to irrational desciplinary behavior or post acquisition integration issues. We also find some evidence that depositor market discipline may have an impact on the competitive fetaures of local banking markets post resolution.     

The effect of TARP on bank risk-taking

One of the largest responses of the US government to the recent financial crisis was the Troubled Asset Relief Program (TARP). TARP was originally intended to stabilize the financial sector through the increased capitalization of banks. However, recipients of TARP funds were then encouraged to make additional loans despite increased borrower risk. In this paper, we consider the effect of the TARP capital injections on bank risk-taking by analyzing the risk ratings of banks’ commercial loan originations during the crisis. The results indicate that, relative to non-TARP banks, the risk of loan originations increased at large TARP banks but decreased at small TARP banks. Loan levels also moved in different directions for large and small banks and, in supporting evidence, these effects are evaluated based on loan size and TARP repayment. For large banks, the increase in risk-taking without an increase in lending is suggestive of moral hazard due to government support. These results may also be due to the conflicting goals of the TARP program for bank recapitalization and bank lending.     

The expansion of services in European banking: Implications for loan pricing and interest margins

Our study of 602 European banks over 1996–2002 investigates how the banks’ expansion into fee-based services has affected their interest margins and loan pricing. We find that higher income share from commissions and fees is associated with lower margins and loan spreads. The higher the commission and fee income share, moreover, the weaker the link between bank loan spreads and loan risk. The latter result is consistent with the conjecture that banks price (or misprice) loans to increase sales of other services. That loss leader (or cross selling) hypothesis has implications for bank regulation and competition with (non-bank) lenders.     

Government guarantees of loans to small businesses: Effects on banks’ risk-taking and non-guaranteed lending

We analyzed the loan guarantees that the Japanese government provided for banks’ loans to small and medium-sized enterprises (SMEs). We modeled and estimated how much and under what conditions loan guarantees affected banks’ risk-taking and banks’ non-guaranteed lending.In the presence of controls for bank capital and other factors that might affect supplies of bank credit, our estimates supported our model's implications that loan guarantees increased banks’ risk-taking.Consistent with our model, our estimates imply that, when banks initially had fewer guaranteed loans and then got more guaranteed loans, guaranteed loans were complements to, rather than substitutes for, non-guaranteed loans. As complements, loan guarantees could be “high-powered” in that they generated increases not only in guaranteed loans, but also increases in non-guaranteed loans that were a multiple of the increases in guaranteed loans. In addition, banks’ having more capital was associated with doing more non-guaranteed lending.     

The determinants of bank interest rate margins: an international study

This paper studies the determinants of bank net interest margins (NIMs) in six selected European countries and the US during the period 1988–1995 for a sample of 614 banks. We apply the Ho and Saunders model (Ho, T., Saunders, A., 1981. The determinants of bank interest margins: theory and empirical evidence. Journal of Financial and Quantitative Analyses 16, 581–600) to a multicountry setting and decompose bank margins into a regulatory component, a market structure component and a risk premium component. The regulatory components in the form of interest-rate restrictions on deposits, reserve requirements and capital-to-asset ratios have a significant impact on banks NIMs. The empirical results suggest an important policy trade-off between assuring bank solvency—high capital-to-asset ratios—and lowering the cost of financial services to consumers—low NIMs. The more segmented or restricted the banking system—both geographically and by activity—the larger appears to be the monopoly power of existing banks, and the higher their spreads. Macro interest-rate volatility was found to have a significant impact on bank NIMs; this suggests that macro policies consistent with reduced interest-rate volatility could have a positive effect in reducing bank margins.     

Foreign bank penetration and the lending channel in emerging economies: Evidence from bank-level panel data

This paper examines the main implications of recently increasing foreign bank penetration on bank lending as a channel of monetary policy transmission in emerging economies. Using a dynamic panel model of loan growth, we investigate the loan granting behavior of 1273 banks in the emerging economies of Asia, Latin America, and Central and Eastern Europe during the period from 1996 to 2003. Applying the pooled OLS, system GMM, and panel VAR estimators, we find consistent evidence that foreign banks are less responsive to monetary shocks in host countries, as they adjust their outstanding loan portfolios and interest rates to a lesser extent than domestic private banks, independent of their liquidity, capitalization, size, efficiency, and credit risk, and although there exists a bank lending channel in the emerging economies, it is declining in strength due to the increased level of foreign bank penetration. We also explore possible driving factors for the different responses of foreign and domestic banks to monetary policy shocks by investigating foreign banks’ different behavior during banking crises and tranquil periods, the effects of mode of entry to host countries, the home-country effects, and the response of foreign banks from OECD countries vs. all foreign countries including non-OECD countries. We suggest the access of foreign banks to funding from parent banks through internal capital markets as the most convincing explanation.     

Do Information Rents in Loan Spreads Persist over the Business Cycles?

In this paper, we seek empirical evidence for information rents in loan spreads by analyzing a sample of UK syndicated loan contracts for the period from 1996 to 2005. We use various measures for borrower opaqueness and control for bank, borrower and loan characteristics and we find that undercapitalized banks charge approximately 34 bps higher loan spreads for loans to opaque borrowers. We further analyze whether this effect persists throughout the business cycle and find that this effect prevails only during recessions. However, we do not find evidence that banks exploit their information monopolies during expansion phases.     

借贷便利创新工具有效影响了商业银行贷款利率吗？

本文基于手工收集的2009—2017年中国银行业数据,利用我国借贷便利工具创新这一准自然实验,以借贷便利工具的运用需要商业银行提供合格担保品这一要求为切入点,考察了借贷便利工具对商业银行贷款利率的影响。研究发现,借贷便利工具创设后,商业银行持有的合格担保品规模越大,其贷款利率越低,且这一效应随着时间推移逐渐增强。进一步的作用机制检验发现,央行的借贷便利操作扩大了商业银行向中央银行借款规模和贷款投放规模,从而有效降低了商业银行贷款利率,也表明借贷便利工具可通过商业银行合格担保品渠道发挥作用。因此,可以通过调整借贷便利操作规模、操作利率以及合格担保品范围的方式有效影响商业银行贷款利率进而发挥对社会融资成本的调控作用。     

Bank Capital and Lending Relationships

This paper investigates the mechanisms behind the matching of banks and firms in the loan market and the implications of this matching for lending relationships, bank capital, and credit provision. I find that bank‐dependent firms borrow from well‐capitalized banks, while firms with access to the bond market borrow from banks with less capital. This matching of bank‐dependent firms with stable banks smooths cyclicality in aggregate credit provision and mitigates the effects of bank shocks on the real economy.     

Funding liquidity and bank risk taking

This study examines the relationship between funding liquidity and bank risk taking. Using quarterly data for U.S. bank holding companies from 1986 to 2014, we find evidence that banks having lower funding liquidity risk as proxied by higher deposit ratios, take more risk. A reduction in banks’ funding liquidity risk increases bank risk as evidenced by higher risk-weighted assets, greater liquidity creation and lower Z-scores. However, our results show that bank size and capital buffers usually limit banks from taking more risk when they have lower funding liquidity risk. Moreover, during the Global Financial Crisis banks with lower funding liquidity risk took less risk. The findings of this study have implications for bank regulators advocating greater liquidity and capital requirements for banks under Basel III.     

Loan pricing under Basel II in an imperfectly competitive banking market

The new Basel II Accord (2006), established new and revised capital requirements for banks. In this paper we analyze and estimate the possible effects of the new rules on the pricing of bank loans. We relate to the two approaches for capital requirements (internal and standardized) and distinguish between retail and corporate customers. Our loan-equation is based on a model of a banking firm facing uncertainty operating in an imperfectly competitive loan market. We use Israeli economic data and data of a leading Israeli bank. The main results indicate that high quality corporate and retail customers will enjoy a reduction in loan interest rates in (big) banks which, most probably, will adopt the IRB approach. On the other hand high risk customers will benefit by shifting to (small) banks that adopt the standardized approach.     

Herd behavior in the Japanese loan market: Evidence from bank panel data

This paper investigates whether Japanese banks had been following herd behavior in the domestic loan market from 1975 through 2000. Applying the technique developed by Lakonishok, Shleifer, and Vishny [Lakonishok, J., Shleifer, A., Vishny, R.V., 1992. The impact of institutional trading on stock prices, J. Finan. Econ. 32, 23–43] to the data from loans outstanding to different types of borrowers, we obtain evidence indicative of the existence of herding. City banks in Japan had been following a cyclical pattern of herding with one of the peaks around the bubble period in the late 1980s. Adjusting further for herding resulting from rational behavior, evidence indicative of the existence of irrational herding was observed only in the bubble period. Our estimate indicates that a total of some 5 trillion yen of loan increase by city banks during the period of 1987–1989 can be attributed to irrational herd behavior. The results imply that irrational bank behavior in the late 1980s might have contributed to the problems Japanese banks had with non-performing loans. We also obtained evidence for herding among regional banks and among geographically proximate banks.     

The influence of accounting enforcement on earnings quality of banks: Implications of bank regulation and the global financial crisis

We study the effects of country-level accounting enforcement on earnings quality of banks and whether bank regulation substitutes or complements the effect of accounting enforcement on bank earnings quality. We also examine whether the influence of accounting enforcement on bank earnings quality changed after the global financial crisis. Using a sample of listed banks from 40 countries between 2001 and 2014, and abnormal loan loss provisions (ALLP) as our main proxy for earnings quality, we document a consistent and strong association between accounting enforcement and bank earnings quality. More specifically, an increase in accounting enforcement decreases the level of ALLP and decreases the propensity to manage earnings to avoid losses. Furthermore, we provide empirical evidence that bank regulation complements the effect of accounting enforcement on bank earnings quality. Finally, unlike in the pre-crisis period, we find a positive association between accounting enforcement and income-decreasing ALLP in the post-crisis period, which indicates that stronger accounting enforcement is associated with more conservative earnings and higher loan loss reserves. Overall, our results indicate that accounting enforcement reduces opportunistic earnings management.     

Do Loan Loss Provisions Affect the Credit Fluctuations in China’s Banking System?

ABSTRACT

The global financial crisis of 2008 sparked new ideas on pro-cyclical transmission in the financial system. The accounting treatment method of loan loss provisions differs between the accounting standards that banks use and the supervisory rules of banks. This fundamental difference has attracted wide attention from academics and regulators. This article studies whether bank loan loss provisions affect credit fluctuation in China’s banking system. We divide loan loss provisions into discretionary and non-discretionary loan loss provisions. We find that non-discretionary loan loss provisions result in greater credit fluctuation, whereas discretionary loan loss provisions have no significant impact on credit fluctuation. Further evidence shows that the relation between non-discretionary loan loss provisions and credit fluctuations does not vary among different types of banks. Overall, our study shows that non-discretionary loan loss provisions can increase credit fluctuation and therefore strengthen banks’ pro-cyclical behavior.     

Loan officers and relationship lending to SMEs

Previous research suggests that loan officers may play a critical role in relationship lending by producing soft information about SMEs. For the first time, we analyze this hypothesis and find empirical evidence that indicates that loan officer activities are associated with bank production of soft information. We also find that loan officers at small banks produce more soft information than at large banks, but large banks appear to have the equivalent potential to underwrite relationship loans. Nevertheless, large banks choose instead to focus their resources on transactions lending.     

The institutional memory hypothesis and the procyclicality of bank lending behavior

We test a new hypothesis that may help explain the procyclicality of bank lending. The institutional memory hypothesis is driven by deterioration in the ability of loan officers over the bank's lending cycle that results in an easing of credit standards. We test this hypothesis using data from individual US banks over 1980–2000: over 200,000 bank-level observations on commercial loan growth, over 2,000,000 loan-level observations on interest rate premiums, and over 2000 bank-level observations on credit standards and loan spreads from bank management survey responses. The empirical analysis supports the hypothesis, although there are differences by bank size class.