Can Social Cohesion be Harnessed to Repair Market Failures? Evidence from Group Lending in Guatemala

The success of group lending in developing countries has been attributed to the ability of the institution to mitigate asymmetric information problems in credit markets. Previous research has offered a number of explanations for this phenomenon: social ties between borrowing group members, internal group pressure to repay loans, and peer monitoring. This research presents empirical tests on borrowing group data from Guatemala which indicate that peer monitoring significantly effects borrowing group performance through stimulating intra-group insurance. Group pressure is found to have a small effect in deterring moral hazard, while the effect of social ties among members is statistically insignificant.     

A cause for policy concern: the expansion of household credit in middle-income economies

This article discusses the significance of the recent growth in household credit across a range of middle-income economies. This growth is understood primarily as a result of policy, including the promotion of individual borrowing as a means to fund access to housing, education and health. A formal model of credit extension and allocation is developed, establishing that consumption lending makes a comparatively stronger contribution to aggregate profitability as well as financial fragility than production lending. Consumption lending may be understood to create distinctive endogenous tendencies to credit-market instability. The findings point to the need for a critical reconsideration of reliance on this lending for social and macroeconomic policy.     

Econometric analysis of bank lending and business cycles in South Africa

This article examines econometric relationships between bank lending and business cycle in South Africa. Two long-run economic relationships are hypothesized between total credit and the variables, namely, coincidental indicators, spread between lending and borrowing rates, money supply, stock price index, inflation and banking sector specific factors included in the model. Of these variables, only coincident indicators, changes in money supply as well as capital, and reserve are found to exert some influence on short-run total credit availability.     

International credit and welfare: A paradoxical theorem and its policy implications

This paper considers a developing nation that faces a foreign exchange shortage and hence its demand for foreign goods is limited both by its income and its foreign exchange balance. Availability of international credit relaxes the second constraint. We develop a simple model of strategic interaction between lending institutions and firms, and show that the availability of international credit at concessionary rates can leave the borrowing nation worse off than if it had to borrow money at higher market rates. This ‘paradox of benevolence’ is then used to motivate a discussion of policies pertaining to international lending and the Southern government's method of rationing out foreign exchange to the importers.     

Explaining changes in the US credit card market: Lenders are using more information

We examine two changes in the cross-sectional distribution of credit card contracts over time: the increasing variance in interest rates and the increasing variance in credit limits, using data from the 1989–2013 Survey of Consumer Finances. Within this dataset, we show that financial institutions seem to be collecting and using more consumer information when extending credit. We then develop a life-cycle model of lending using a novel contract structure reflecting modern credit cards, where interest rates and credit limits are jointly determined before actual borrowing takes place. Within the model, giving lenders more information on consumers generates realistic results along several dimensions. More information leads to better pricing, moving the market from a ‘pooling’ to a ‘separating’ equilibrium, generating the observed increase in variances, with the gains primarily going to young agents.     

Transactions,credit, and central banking in a model of segmented markets

A segmented markets model is constructed in which transactions are conducted using credit and currency. Goods market segmentation plays an important role, in addition to the role played by conventional segmentation of asset markets. An important novelty of the paper is to show how the nonneutralities of money and their persistence depend on the nature of goods market transactions and on the arrangements for clearing and settlement of consumer credit. The model permits open market operations, daylight overdrafts, reserve-holding, and overnight lending and borrowing, allowing the consideration of a rich array of central banking arrangements and their implications.     

The suspension of borrowing: an implicit penalty for loan default under imperfect information

A credit seeker may be suspended from borrowing for a period of time due to a previous default. Such suspension is widely used in bank lending through credit check. Our work analyses the effects of suspension on the investment choice of borrowers under uncertainty and on the lending policy of banks facing asymmetric information. We show that suspension should be tightened at low loan rates, but loosened otherwise, to improve the repayment performance of borrowers. We also show that although credit rationing may not be completely removed due to imperfect information, the excess demand for credit or transitive waiting in the market can actually be attenuated by such efficient use of suspension. Our theoretical predictions are consistent with observed cyclical patterns of changes in lendingrates and suspension severity.     

Financial constraints and occupational choice in Thai villages

Financial constraints and entrepreneurship are key factors affecting economic performance in developing countries. I formulate and solve a model of occupational choice with moral hazard under three alternative financial market environments: savings only, borrowing and lending with default and moral hazard constrained insurance. I use computationally efficient techniques based on mechanism design, genetic algorithms and maximum likelihood to estimate and statistically test these models of financial constraints. Using occupational choice data from Thai villages I find evidence that the saving only regime is rejected in favor of regimes allowing for borrowing and/or insurance, especially in higher-wealth data stratifications. A direct test between the borrowing and insurance regimes reveals that neither can be rejected in favor of the other. Allowing ex-ante lotteries over wealth improves the explanatory power of the model. I also find evidence for differences in the best fitting regimes by region, wealth, and access to formal credit.     

Can funding platforms’ self-initiated financial innovation improve credit availability? Evidence from China’s P2P market

In this article, we used loan transaction data from a Chinese Peer-to-Peer (P2P) platform and employed a Difference-In-Differences (DID) approach to detect the effect of a self-initiated financial innovation introduced via P2P borrowing and lending. We found that the self-initiated financial innovation improved the availability of credit.     

基于K-S检验与距离相关分析的网络借贷信用评价指标体系构建

网络借贷作为一种新型互联网金融模式,提升了金融资源使用效率,缓解了小企业融资难的困局。构建合理的网络借贷信用评价指标体系,从而对网络借贷的潜在风险及时甄别与预防,对互联网金融健康持续发展意义重大。本文根据K-S检验与距离相关分析相结合,筛选对借款客户违约状态甄别能力强的指标,建立了网络借贷信用评价指标体系,通过P2P网络借贷(peer to peer lending,个人对个人借贷)平台LendingClub交易数据进行实证研究,结果表明:不仅借款金额、借款利率等借款标的特征对借贷者违约具有显著相关性,借款者年龄等个人特征、借款者年收入等财务特征以及借款者违约次数等信用特征均对借贷者违约风险产生显著影响。投资者在出借资金时,往往青睐于已婚、年龄适中、具有一定工作经历、历史违约次数较少的借款人。因此,风险监管部门应构建网络借贷违约风险评估模型,对P2P平台进行风险监测,同时建立关键信息共享机制,融合多源数据,明确审查范围,实现P2P网络借贷行业健康有序发展。     

A corporate balance-sheet approach to currency crises

This paper presents a general equilibrium currency crisis model of the ‘third generation’, in which the possibility of currency crises is driven by the interplay between private firms’ credit-constraints and nominal price rigidities. Despite our emphasis on microfoundations, the model remains sufficiently simple that the policy analysis can be conducted graphically. The analysis hinges on four main features (i) ex post deviations from purchasing power parity; (ii) credit constraints a la Bernanke-Gertler; (iii) foreign currency borrowing by domestic firms; (iv) a competitive banking sector lending to firms and holding reserves and a monetary policy conducted either through open market operations or short-term lending facilities. We derive sufficient conditions for the existence of a sunspot equilibrium with currency crises. We show that an interest rate increase intended to support the currency in a crisis may not be effective, but that a relaxation of short-term lending facilities can make this policy effective by attenuating the rise in interest rates relevant to firms.     

Lending technologies,banking relationships,and firms’ access to credit in Italy: the role of firm size

This paper analyses the role of lending technologies and banking relationships on firms’ credit access in Italy. Using EFIGE firm-level data, we show that the depth and strength of firm–bank relationships have heterogeneous effects on credit demand and rationing probabilities depending on the size of the borrower. Multiple banking relationships alleviate financial constraints for small firms, while borrowing from a large number of lenders hinders access to credit for large companies. Small and medium-sized enterprises with a higher share of debt with the main bank have a lower probability of being credit denied, as debt concentration contributes to overcome the opacity problems typical of the SMEs. Long-lasting relationships, by reducing information asymmetries, significantly improve access to credit for small and large firms. Conversely, we find that medium-sized enterprises are more exposed to financing constraints as relationship duration increases, due to possible lock-in effects. Finally, firms maintaining banking relationships based on transactional technologies are more likely to be credit denied, while the use of relationship lending technologies improves credit availability for both small and large enterprises.     

Balance Sheet Effects, Bailout Guarantees and Financial Crises

This paper provides a model of boom-bust episodes in middle-income countries. It is based on sectoral differences in corporate finance: the nontradables sector is special in that it faces a contract enforceability problem and enjoys bailout guarantees. As a result, currency mismatch and borrowing constraints arise endogenously in that sector. This sectoral asymmetry allows the model to replicate the main features of observed boom–bust episodes. In particular, episodes begin with a lending boom and a real appreciation, peak in a self-fulfilling crisis during which a real depreciation coincides with widespread bankruptcies, and end in a recession and credit crunch. The nontradables sector accounts for most of the volatility in output and credit.     

Economic Analysis and the World Debt Problem

The world debt problem continues to pose the greatest threat to international financial stability since World War II. This article reviews the contribution of economic theory to analysis of the debt problem. The textbook model of country borrowing is found to identify limits on borrowing that are considerably weaker than those likely to be faced in the real world. In particular, too little attention has been paid in the literature to uncertainty about key assumptions, to limits on the ability of governments to tax domestic resources and to the ability of debtor countries to generate foreign exchange. The article also looks at the application of banking models to country lending.     

中国不确定性信贷市场中的贷款供求微观机理分析——一个基于主观概率决策的信贷市场非均衡模型

文章立足于中国垄断竞争型的信贷市场,探讨了不确定性条件下贷款需求与贷款供给之间的微观作用机理。与新凯恩斯主义以信息不对称假设为基础的研究方法不同,文章以借贷双方根据对项目成功概率的主观判断进行贷款供求决策为基本假设,建立了一个有利于解释中国现实信贷市场运作机制的模型。结果显示,在不同的参数范围内,贷款供求之间可能出现完全配给、贷款供给限制、贷款需求限制和借贷宽松等四个区域。这种分析方法也有利于辨别货币供给的内外生性问题。     

Lending policies of informal, formal and semiformal lenders

This paper compares lending policies of formal, informal and semiformal lenders with respect to household lending in Vietnam. The analysis suggests that the probability of using formal or semiformal credit increases if borrowers provide collateral, a guarantor and/or borrow for business‐related activities. The probability of using informal credit increases for female borrowers. It also appears that the probability of using formal credit increases in household welfare up to a certain threshold, but at a decreasing rate. In addition, the paper discerns the determinants of probability of default across lender types. Default risk of formal credit appears to be strongly affected by formal loan contract terms, e.g., loan interest rate and form of loan repayment, whereas default risk on informal loans is significantly related to the presence of propinquity and other internal characteristics of the borrowing household. Overall, the study raises several important implications for the screening, monitoring and enforcement instruments that may be employed by different types of lenders.     

DEALER PRICING OF CONSUMER CREDIT*

Price discrimination incentives may induce dealers to bear the financial cost of their customers' credit purchases. We focus on how financial market imperfections make it possible to segment the customer population. When borrowing and lending rates differ from each other and from the rate of interest on a durable good purchase, the structure of those rates influences customers' choices to purchase on credit or cash terms, and the scope for dealers' price discrimination. Empirical analysis of a set of installment‐credit, personal‐loan, and regional interest rate data offers considerable support to the assumptions and implications of our theoretical framework.     

Do interest rate controls work? Evidence from Kenya

This paper reviews the impact of interest rate controls in Kenya, introduced in September 2016. The intent of the controls was to reduce the cost of borrowing, expand access to credit, and increase the return on savings. However, we find that the law on interest rate controls has had the opposite effect of what was intended. Specifically, it has led to a collapse of credit to micro‐, small‐, and medium‐sized enterprises; shrinking of the loan book of the small banks; and reduced financial intermediation. Because of their adverse effects on bank lending, we estimate that the interest rate controls have reduced economic growth by ¼–¾ percentage points on an annual basis. We also show that interest rate caps reduced the signaling effects of monetary policy. These suggest that (1) the adverse effects could largely be avoided if the ceiling was high enough to facilitate lending to higher‐risk borrowers and (2) alternative policies could be preferable to address concerns about the high cost of credit.     

Who gains from non-collusive corruption?

Non-collusive corruption, i.e., corruption that imposes an additional burden on business activity, is particularly widespread in low-income countries. We build a macroeconomic model with credit market imperfections and heterogeneous agents to explore the roots and consequences of this type of corruption. We find that credit market imperfections, by generating rents for the incumbent entrepreneurs, create strong incentives for corrupt behavior by state officials. However, non-collusive corruption not only redistributes income from non-officials towards officials but also within the group of potential entrepreneurs. If borrowing is limited, bribes prevent poorer but talented individuals from starting a business. But this is likely to benefit those who may enter anyway; the cost of capital is lower and there is less competition on the goods markets.     

Financial constraints and the balance sheet channel: a re-interpretation

Aggregate demand models extending IS/LM fixed price framework yield an enhancement mechanism of the traditional monetary transmission mechanism, the credit channel, which, according to the credit view, works through the ‘balance sheet channel’ and the ‘bank lending channel’. In this paper the augmented IS/LM model is modified assuming that investments may be financed by both internal and external sources of funds. The inclusion of internal funds in the augmented IS/LM fixed price model suggests a different interpretation of the ‘balance sheet channel’ as an enhancement mechanism amplifying monetary policy effects through the quantity rather than the cost of borrowing. Thus, changes in borrowers’ net worth over the cycle can amplify and propagate output fluctuations directly rather than indirectly as in the traditional interpretation of the balance sheet channel. The empirical analysis of the monetary transmission mechanism for Italy in the last decade accords with the interpretation of the balance sheet channel proposed in this paper.