Bank Loan Announcements and Borrower Stock Returns: Does Bank Origin Matter?

Banks play a special role as providers of informative signals about the quality and value of their borrowers. Such signals, however, may have a quality of their own as the banks' selection and monitoring abilities may differ. Using an event study methodology, we study the importance of the geographical origin and organization of the banks for the investors' assessments of firms' credit quality and economic worth following loan announcements. Our sample comprises 986 announcements of bank loans to US firms over the period of 1980–2003. We find that investors react positively to such announcements if the loans are made by foreign or local banks, but not if the loans are made by banks that are located outside the firm's headquarters state. Investor reaction is, in fact, the largest when the bank is foreign. Our evidence suggest that investors value relationships with more competitive and skilled banks rather than banks that have easier access to private information about the firms. These results are applicable also to the European markets where regulatory and economic borders do not coincide and bank identities and reputation seem to matter a great deal.     

The trade credit channel revisited: evidence from micro data of Japanese small firms

It is suggested that trade credit can be a substitute for bank loans for small- and medium-sized enterprises (SMEs) that have little access to external funding sources. Using unique cross-sectional survey data of Japanese SMEs, we conduct a deep investigation into the substitutability between bank loans and trade credit. This survey contains rich information on the suppliers of trade credit to SMEs, thus enabling the examination of the channel through which credit is provided from suppliers to customers. We find that SMEs with little access to bank credit depend more on large suppliers for trade credit. We also find that when a purchase is made from a large supplier, more credit is indeed provided in the form of trade credit. Furthermore, this channel of credit from large suppliers to SMEs is only observed for solvent customers, not for insolvent customers. Our findings suggest that trade credit plays an important role for entrepreneurial firms over the financial growth cycle. For young and small firms with little access to bank loans trade credit is an important funding source.     

Banking Reforms for the 21st Century: A Perfectly Stable Banking System Based on Financial Innovations*

Although bank loans themselves are somewhat illiquid because of private information, most of their cashflows are not. Recent financial innovations allow commercial loans to be liquefied via credit derivatives and actual and synthetic securitizations. The loan originating bank holds the remaining illiquid equity tranche containing the concentrated credit risk, private information rent and the ‘excess spread’ that incentivize the bank to continue to monitor and service the loans. Empirically, we find that the average size of the equity tranche is about 3% for the representative commercial loan portfolios in our sample. The liquefaction of bank loans makes possible a banking system that restricts the guaranteed accounts to be backed by 100% reserves and the non‐guaranteed deposits to be backed by liquid securitized loan tranches, while retaining the deposit‐lending synergy. Such a system is perfectly safe without deposit insurance and it renders banks bankruptcy‐remote without sacrificing a bank's traditional role as a financial intermediary.     

Sectoral credit reallocation: An excessive bank risk-taking explanation

This paper develops a theoretical model to provide an alternative explanation for the credit to nontradable sector growing faster than credit to tradable sector, after a US expansionary monetary policy, based on an excessive risk-taking channel. This is, a reduced foreign interest rate decreases bank default probability, which in turn diminishes banks’ incentives to take excessive risk. This produces a reallocation of loan supply to nontradable sector since tradable loans are riskier. Using monthly sectoral credit data at the bank level for the Peruvian economy in the 2004–2019 period, we find evidence of the excessive bank risk-taking channel on sectoral credit reallocation.     

Shadow banking in Asia: Foreign versus domestic lending to real estate projects

We compare the types of loans and their rates of returns for domestic versus offshore small and mid-sized private real estate credit funds. The data indicate offshore private credit funds issue smaller and subordinated loans to residential projects. Offshore lenders prefer projects in developed Asian markets, and obtain higher rates of return even after controlling for other things such as loan size, seniority, and borrower location. Our findings suggest the presence of pronounced segmentation across real estate lending markets in Asia as offshore lenders are not a substitute for domestic capital.     

Potential Lending Discrimination? Insights from Small Business Financing and New Venture Survival

Previous literature provides potential lending discrimination evidence of disadvantaged women and minority entrepreneurs' high rate of business loan application denial and their unequal access to external and commercial credits in comparison with white business owners. This paper aims to expand the literature and discussions on small business loan discrimination from a new research direction, besides those on loan applications/denials and on loan terms, focusing on the consequences of small business loans in terms of new venture survivability. The proposed new research direction is consistent with similar research approaches in mortgage lending literature examining loan default rates and potential discrimination. The Kauffman Firm Survey data are used with appropriate hazards model for the analysis. Extensive creditworthiness and business survival determinants are applied for controlling for their influences across racial and ethnic groups. The main empirical finding is that after controlling for a wide variety of borrower, establishment, and regional characteristics, business closure rates for minority entrepreneurs are not higher than those for white business owners. This finding does not support the prediction of the model for lender bias against minority entrepreneurs.     

Market power in banking,countercyclical margins and the international transmission of business cycles

By introducing an imperfectly competitive banking sector into a standard two-country, two-good RBC model with complete asset markets, we study the international transmission of aggregate TFP shocks in an environment with noncompetitive financial intermediation. In this model, price-cost margins in a global loan market are endogenous and countercyclical. As a result, a positive TFP shock in one country spills over to another through a reduction in the global cost of both credit and externally financed investment. The quantitative analysis shows that countercyclical margins on loans play a key role in bringing the predictions of the theory closer to the observed cross-country cyclical co-movements of consumption, employment, investment and output. Recessions are deeper when the cost of credit rises during these economic downturns. Thus, a financial accelerator arises in our framework, unveiling the increased importance of stabilization policies in economies where margins in credit markets are countercyclical.     

SBA default rates : Selection bias and credit deterioration

This study estimates the effects of changes in the money and capital markets on small business loan failure rates. It develops a lagged model of the relationship between term structure and risk premium variables and the loan failure rates of the Small Business Administration (SBA). Bank credit availability to small firms is shown to be the key factor in relating changes in economic conditions to changes in the SBA loan failure rates. As bank credit availability changes over an economic cycle, there is a movement of the least risky small firms into and out of the population from which the SBA grants and guarantees loans.     

Sovereign borrowing by developing countries: What determines market access?

What determines the ability of governments from developing countries to access international credit markets? We examine this question using detailed data on sovereign bond issuances and public syndicated bank loans between 1980 and 2000. A key finding of this paper is that the probability of market access is not influenced by a country's frequency of defaults, and that a default, if resolved quickly, does not reduce significantly the probability of tapping the markets. We also find that trade openness, a standard measure of a country's links with the rest of the world, and traditional liquidity and macroeconomic indicators do not help much in explaining market access. However, a country's vulnerability to shocks and the perceived quality of economic policies and institutions appear to influence the government's ability to tap the markets. We also document that the average exclusion from international credit markets following a default declined from four years in the 1980s to two years in the 1990s.     

Effect of climate-related risk on the costs of bank loans: Evidence from syndicated loan markets in emerging economies

Based on a novel dataset that combined syndicated loans originated in the emerging market economies with greenhouse gas emission intensity data of borrowers, this study examines whether and to what extent banks in these emerging markets have factored in climate transition risk in their lending decisions. On loan pricing, our results suggest that banks in these emerging markets have started to price-in climate transition risk for loans to emissions-intensive sector since the Paris Agreement. This could reflect their increased awareness of a climate-transition risk towards such firms. The extent of the transition risk premium is also found to be dependent on the environmental attitude of banks. Specifically, green banks are found to charge a higher loan spread than other banks, when lending to the same brown firm after the Paris Agreement. Apart from pricing a transition risk premium in the loan spread, we find evidence that banks may also consider imposing more stringent non-pricing contractual terms, such as shortening loan tenor and imposing collateral requirement, on brown firms especially when the associated credit risk impacts on these firms are more uncertain.     

Loan Officer Turnover and Credit Availability for Small Firms

This paper presents empirical evidence on the role loan officers play in facilitating small firm access to commercial bank loans. If loan officers use soft information (for example, assessments of character, information from customers and suppliers) to make lending decisions that would not otherwise be made on the basis of hard information (for example, tax returns or financial statements), then, frequent turnover in loan officers should be associated with an adverse effect on credit availability. This relationship is confirmed empirically using survey data of U.S. small firms in 1995 and 2001, where loan officer turnover is positively related to the turndown rate on the most recent loan application. Although loan officer turnover could be influenced by the turndown rate (for example, an owner changes banks and gets a new loan officer as a result of a recent turndown), its negative effect on credit availability persists under several different tests.     

Do bank loans still convey information to investors? Evidence from the split share structure reform in China

Bank loans can convey information about the borrowing firms that have proper corporate governance systems. Using a sample of bank loan announcements in China, we find that the market reaction is positive after the split share structure reform in 2005, which aligns the interests of large shareholders and minority shareholders, government and public investors, and alleviates their tunneling incentives. We also find that this effect is more pronounced for private firms as the reform mainly enhances corporate governance for private firms. The signaling role of bank loans is less pronounced for firms with less severe information asymmetry after the reform, e.g. higher shareholdings of mutual funds and higher proportion of independent directors. Related party transactions decrease when they obtain bank loans after the reform, which reflects the alleviation of tunneling after the reform.     

Perceived credit constraints in the European Union

The promotion and support of small and medium-sized enterprises (SMEs) is an essential component of policies designed to help improve Europe’s economic performance. A crucial issue is whether SMEs face difficulty obtaining bank loans. Using pre-crisis survey data from 2005 and 2006 for nearly 3,500 SMEs (firms with fewer than 250 employees) in the European Union (EU), we investigate the determinants of perceived bank loan accessibility at the firm level and at the country level. Based on hierarchical (multi-level) binomial logit regressions, our findings show that the youngest and smallest SMEs have the worst perception of access to bank loans. The SMEs in nations with concentrated banking sectors are more positive about loan accessibility. In addition, a high fraction of foreign-owned banks is associated with improved perception of loan accessibility in the EU 15 but not in the EU 10.     

Funding Gaps? Access To Bank Loans By High-Tech Start-Ups

This paper aims to shed new light on start-up financing of new technology-based firms (NTBFs) and the existence of credit constraints that may negatively affect their activity. For this purpose, we analyze the different sources of start-up financing used by NTBFs and investigate several characteristics that may influence the extent of recourse to bank loans. In the empirical section, we consider a sample composed of 386 Italian NTBFs that operate both in manufacturing and services. We estimate double-censored tobit and bivariate tobit models so as to highlight the determinants of (i) the financial leverage, measured by the ratio of bank debt to total capital, and (ii) the amounts of personal capital and bank loans of firms at start-up, respectively. Our findings support the view that the credit market is imperfect and there exists a financing hierarchy. In fact, only a minority of firms resorts to outside financing, and especially to bank debt. In addition, the level of financial leverage is not random; it increases with an increase of the predicted amount of firms’ total initial capital, while it decreases with variables such as the number of owners and the work experience of founders that are indicative of greater personal wealth available to finance firms’ start-up. Lastly, the size of the bank loans obtained by firms generally is small and it is quite insensitive to demand-side factors that instead determine the amount of personal and total capital, with the notable exception of scale economies in the industry of the start-up. In other words, in accordance with the argument that credit to NTBFs is rationed, the loan supply curve is highly inelastic, even though not perfectly so.     

Trade credit and bank finance: Financing small firms in russia

This paper argues that Russian financial markets are more developed than typically supposed. I show that non-financial firms, suppliers of credit to other firms, support the role of financial intermediaries in helping to surmount problems of information asymmetries. Trade credit works as a signal; firms receiving it obtain access to bank loans. I test this hypothesis using data from my survey of 352 firms in Russia in 1995. Firms using trade credit are shown to have a higher probability of acquiring bank credit.     

Internal vs External Financing of R&D

The empirical evidence suggests that while small firms in United States, United Kingdom and Canada rely on internal funds for financing R&D, similar firms in Japan, Germany and France have access to bank loans. In this paper, we analyze the financial decisions of small firms willing to invest in R&D. We find that their high ratio of intangible assets, along with the high risk nature of their investments, can explain their inability to raise debt in external capital markets. We also show that financing R&D with bank loans might be feasible, especially, if banks are willing to monitor the investment activities of their clients.     

基于Credit Metrics模型的CDS定价研究

信用违约互换（Credit Default Swaps,CDS）作为当今国际上最流行的的信用衍生工具,被广泛应用于商业银行的信用风险管理中。Credit Metrics模型被广泛运用于度量信用风险的大小,在应用Credit Metrics模型计算商业银行贷款的VaR基础上探讨CDS的定价问题。以单笔贷款为例来说明该模型探讨CDS定价实际运用过程,对我国商业银行信用风险管理的提高有一定指导作用。     

Product market competition and access to credit

In this paper, we unveil a disregarded benefit of product market competition for firms. We introduce the probability of bankruptcy in a simple model where firms compete à la Cournot and apply for collateralized bank loans to undertake productive investments. We show that the number of competitors and the existence of outsiders willing to acquire the productive assets of distressed incumbents affect the equilibrium share of investment financed by bank credit. Using a sample of Italian manufacturing firms, mostly small- and medium-sized enterprises (SMEs), we found evidence showing that the degree of product market competition is positively correlated with the share of investment financed by bank credit only when outsiders are absent.     

Small‐Dollar Credit Lending: The Effect of Financial Burden on Personal Asset Misvaluation

Small‐dollar credit lenders offer consumers quick access to cash in the form of products, such as pawn loans. The consumers who tend to use these small‐dollar credit products are more likely to face financial burden and potential for default—particularly when loan‐to‐value ratios are high. However, the cognitive effects of financial burden can impair financial decision making. If financial literacy educators are to empower consumers, more consumer‐centric evidence is necessary to determine how small‐dollar credit consumers make decisions when purchasing loans. One critical decision consumers make is accepting how lenders value their assets in exchange for credit. Three lab studies assess how consumers facing financial burden value their own assets. We find that, due to cognitive constraints of financial burden, consumers can undervalue functional assets and overvalue symbolic assets. Importantly for financial literacy efforts, however, we show that framing a symbolic asset in terms of other‐benefit construal helps attenuate asset overvaluation.     

Does Bank Consolidation Hurt the Small Business Borrower?

The recent wave of mergers in the commercial banking sector in the United States has led to tremendous industry consolidation. Some fear that such consolidation will leave the small business borrower with fewer opportunities to obtain bank credit. This study uses regression analysis to empirically determine if consolidation has caused larger banks to abandon relationship loans extended to small businesses over time. If so, this leaves small business borrowers with two distinctly different choices, a low interest rate loan from a large bank for those small business borrowers who qualify or a high interest rate loan from a small bank for those who do not. The results of this study support this theory, and find consolidation has raised small business loan rates at small banks and lowered rates at large banks, ceteris paribus.