Do credit commitments compromise credit quality?

This paper focuses on banks’ risk-taking arising from potentially excessive growth of loans and off-balance sheet credit commitments. Credit quality is investigated both in macro and micro context, using a panel of 28 European countries over 2004–2014 and a panel of 478 European banks over 2004–2013. The dynamic panel data estimation results confirm that an increase in the ratio of credit commitments to total assets is a two year ahead warning indicator of growth in the ratio of non-performing loans and loan loss reserves. Simultaneous equation estimation exemplifies that the adverse effect of credit commitments on credit quality stems from the credit boom-bust context. As the economic impact of credit commitments to credit quality is significant compared to that of traditional credit quality determinants (real GDP growth and real growth in loans), the consideration of a credit commitments measure may improve timely recognition of credit risk accumulation episodes.     

Are college students at greater risk of credit card abuse? Age,gender, materialism and parental influence on consumer response to credit cards

Two studies examine age, gender, parental influence and materialism effects on consumers’ credit card attitudes and behavior. Credit card commitment and use are greater among older adults than college students. Women outperform men in managing balances. Materialism heightens commitment, trust and use, but interferes with outstanding balance management. Parental influence can improve students’ commitment, trust, use and balance management while discouraging overuse. Parental influence also mediates materialism's effect on trust and balance management. Overall, findings show college students are not more vulnerable than older adults to credit card abuse, but that students who are female, materialistic and with less parental influence are at more risk.     

TARP announcement,bank health,and borrowers’ credit risk

Theory suggests that unhealthy banks exhibit more pronounced flight-to-quality behavior during financial crises and, hence, the infusion of capital through unhealthy banks is less effective in relieving the liquidity shocks of vulnerable borrowers. We test these predictions by investigating how the financial health of leading US banks influenced their borrowers’ credit risk surrounding the announcement of the Troubled Asset Relief Program (TARP). Changes in borrower credit risk, measured by credit default swap (CDS) spreads, should reflect the expected relief from liquidity shocks and other benefits of rescuing banks, such as maintaining the existing lending relationships. Consistent with the theory, prior to the TARP capital infusions, unhealthy banks’ borrowers with high leverage experienced a greater increase in their credit risk relative to similar healthy banks’ borrowers. Following the event, the CDS market anticipated less liquidity relief to these vulnerable unhealthy banks’ borrowers, but more liquidity relief to the vulnerable healthy banks’ borrowers.     

Discussion of “Financial statement comparability and credit risk”

Comparability of financial statements has been a subject that is often referred to by academics and practitioners alike. In recent years, researchers have attempted to develop a quantifiable framework to study the benefits of comparability from the perspective of equity markets. Kim et al. (2013) approach this issue from the perspective of credit markets. This discussion of their paper has three objectives. First, it critiques their proxy for comparability and offers suggestions on how to validate their assumptions. Second, it recommends improvements to their research design, keeping in mind nuances of credit as an asset class. Finally, to help the authors with their future research, it offers proxies for comparability and information asymmetry that can be developed through some new datasets that have become available to researchers.     

The cost of being late? The case of credit card penalty fees

This paper is the first in the literature to examine the determinants of US credit card penalty fees. Many critics of credit card fees – including a number of US Senators – have argued that credit card penalty fees reflect banks’ market share. Using a unique data set we find that fees are increasing in customer risk which supports the position of defenders of penalty fees, such as banks. However, our finding that fees are increasing in a bank's market share is consistent with the concerns expressed by politicians and regulators. We also find card penalty fees are direct substitutes for card interest rates.     

Merchants and credit cards: Determinants,perceptions and current practices — A case of Malaysia

The credit card industry is made up of two business segments: the issuance of credit cards to consumers and the acquisition of merchants into the credit card payment scheme. Accepting credit card payments is an important business decision that involves cost, benefits and risk considerations. The paper discusses the merchants' personal and business characteristics and the perceptions of merchants towards the credit card payment system, both of which contribute significantly to merchants' acceptance of credit card payments. It is found that perceptions related to the social influence and performance expectancy constructs of the Unified Theory of Acceptance and Use of Technology play the most important role in a merchant's decision.     

Debit or credit?

Empirical consumer payment price sensitivity has implications for theory, optimal regulation of payment card networks, and business strategy. A critical margin is the price of a credit card charge. A revolver who did not pay her most recent balance in full pays interest; other credit card users do not. I find that revolvers are substantially less likely to incur credit card charges and substantially more likely to use a debit card, conditional on several proxies for transaction demand and tastes. Debit use also increases with credit limit constraints and decreases with credit card possession. Additional results suggest that debit is becoming a stronger substitute for credit over time.     

Bank credit risk and credit information sharing in Africa: Does credit information sharing institutions and context matter?

The study examines credit information sharing through private credit bureaus and public credit registries and their effect on bank credit risk in low and high income countries in Africa. The study covers periods between 2006 and 2012 with 548 bank observations in Africa. Employing a Prais-Winsten panel data estimation, the study established that credit information sharing whether through private credit bureaus or public credit registries reduces bank credit risk in both low and high income countries and Africa as a whole. Further analyses reveal that credit information shared through public credit registries was only negatively and significantly related to bank credit risk when all countries that share credit information through public credit registries are observed as one unit but had no significant effect in low or high income countries. On the contrary, credit information shared through private credit bureaus reported a negative and significant effect on credit risk in low and high income countries as well as all countries that shared information through private credit bureaus. This suggests that credit information shared through private credit bureaus are more robust in dealing with bank credit risk regardless of a banks’ income bracket. Hence, countries that do not share credit information should do so especially through private credit bureaus so as to help reduce bank credit risk regardless of the income bracket differences. Again, governments in Africa must enact laws that expand the coverage and scope of credit information shared so as to enhance the effectiveness of information sharing.     

Does bank competition reduce cost of credit? Cross-country evidence from Europe

Despite the extensive debate on the effects of bank competition on economic welfare and growth, only a handful of single-country studies deal with the impact of bank competition on the cost of credit. We contribute to the literature by investigating the impact of bank competition on the cost of credit in a cross-country setting. Using a panel of firms from 20 European countries covering the period 2001–2011, we consider a broad set of measures of bank competition, including two structural measures (Herfindahl–Hirschman index and CR5), and two non-structural indicators (Lerner index and H-statistic). We find that bank competition increases the cost of credit and observe that the positive influence of bank competition is stronger for smaller companies. Our findings accord with the information hypothesis, whereby a lack of competition incentivizes banks to invest in soft information and conversely increased competition raises the cost of credit. This positive impact of bank competition is however influenced by the institutional and economic framework, as well as by the crisis.     

Are credit ratings procyclical?

This paper studies the influence of the state of the business cycle on credit ratings. In particular, we assess whether rating agencies are excessively procyclical in their assignment of ratings. Our analysis is based on a model of ratings determination that takes into account factors that measure the business and financial risks of firms, in addition to indicators of macroeconomic conditions. Utilizing annual data on all US firms rated by Standard & Poor’s, we find that ratings do not generally exhibit excess sensitivity to the business cycle. In addition, we document that previously reported findings of a secular tightening of ratings standards are not robust to a more complete accounting of systematic changes to measures of risk.     

CEO ability heterogeneity,board’s recruiting ability and credit risk

This study investigates the effects of the CEO (Chief Executive Officer) ability heterogeneity of an industry and the board’s recruiting capability on firm credit risk by using 26,235 America bond data from the year 2001 to 2014. We find that both CEO ability heterogeneity and board’s recruiting ability enhance a firm’s credit quality when controlling for other well-known determinants of bond yield spreads, implying that high CEO ability heterogeneity and good board’s recruiting ability both encourage a firm to replace the underperformed CEO earlier and improve the firm’s subsequent performance, which enhances firm value and credit quality (Merton in J Finance 29(2):449–470, 1974). We also find that good macroeconomic conditions weaken the effect of CEO ability heterogeneity on bond yield spreads while enhance that of board’s recruiting ability. Moreover, board’s recruiting ability weakens the effect of CEO ability heterogeneity on bond yield spreads, indicating that there may exist a trade-off relationship between the CEO ability heterogeneity effect and the board’s recruiting ability effect. Finally, the results are robust when considering endogeneity issues and other measures of CEO ability heterogeneity.     

The impact of multi-dimensional corporate transparency on us firms’ credit ratings and cost of capital

This study examines corporate transparency in the US market for a sample of 319 S&P 500 firms. We examine whether a number of disparate measures of corporate transparency used by other researchers are distinct, cohere as measures of a single factor of corporate transparency, or capture multiple different dimensions. Next, we begin to examine the impact of corporate transparency, conceived in the broadest sense, and not limited to financial reporting, on US firms. We develop a model of corporate transparency based on a broad definition and framework proposed by Bushman, Piotrowski and Smith, which we extend in several ways, and then study the effect of corporate transparency on cost of debt, credit rating, and cost of equity. First, we find that corporate transparency is neither a unitary concept nor merely an ambiguous term for multiple distinct concepts: factor analysis of ten corporate transparency variables identifies four independent underlying dimensions: public disclosure information, intermediary information, earnings quality information and insider information. Second, we find that corporate transparency has significant power to explain cross-sectional variation in credit rating and cost of capital. More specifically, (i) credit rating, cost of debt, and beta are significantly associated with disclosure information transparency; (ii) credit rating, cost of equity, and beta are significantly associated with intermediary information transparency; and (iii) cost of equity and beta are significantly associated with insider information transparency. Our findings offer a more comprehensive evaluation of corporate transparency than prior studies, and we demonstrate direct economic implications for both US firms and markets.     

Lemmings in the bond market? An empirical analysis of the term structure of credit spreads

The paper examines the credit spread between government and corporate bonds at different maturities. Theoretical models assume that credit risk premiums for high quality firms monotonously increase with maturity. We find evidence suggesting that bonds issued at maturities attracting the highest issuance volumes tend to have credit risk premiums that are on average 10 to 15 basis points higher than issues at nonconventional maturities. These results point out a shortcoming of existing theoretical models and show that the credit yield curve is not smooth, but affected by the local supply of issues at various parts of the yield curve. In addition, the empirical evidence presented in this paper indicates that firms utilizing the bond markets for funding could lower their funding costs by shifting the term of their debt away from the most commonly targeted maturities.

Applications of Gram–Charlier expansion and bond moments for pricing of interest rates and credit risk

The purpose of this paper is to demonstrate the powerful and flexible applicability of the Gram–Charlier expansion to pricing of a wide variety of interest rate related products involving interest rate risk and credit risk. In this paper, we develop easily implemented approximations of the prices of several derivatives; swaptions, CMS, CMS options, and vulnerable options. Associated with the default risk, a survival contingent forward measure is constructed.     

What is the value of recourse to asset-backed securities? A clinical study of credit card banks

The present paper uses credit card securitization data to show that recourse to securitized debt may benefit short- and long-term stock returns and long-term operating performance of sponsors. Therefore, although recourse violates regulatory guidelines and FASB140, recourse may have beneficial effects for sponsors by revealing that the shocks that made recourse necessary are transitory. Sponsors providing recourse do, however, experience an abnormal delay in their normal issuance cycle around the event. Hence, it appears that the asset-backed securities market is like the commercial paper market, where a firm’s ability to issue is directly correlated with credit quality.     

Role of bank credit on local growth: Do politics and crisis matter?

Although state-owned banks are expected to promote the growth of less-developed regions, especially in developing economies, several cross-country studies report that lending by state banks is associated with the inefficient allocation of credit and low levels of development. Further, state banks have been found to lend to their cronies, especially around elections. In this paper, we study the lending activities of state-owned and private banks during the period 1992–2010 and analyze the relationship between the credit these banks provide and local economic growth in Turkey during crisis periods and in election years. We find that the share of state-owned banks in the credit market in crisis periods and local election years is significantly higher than their share in non-crisis and non-election periods. The per capita real credit that state-owned banks provide during crisis years is found to be positively associated with local growth in all provinces. Our results suggest that although state-owned banks might issue loans for political reasons in election periods, they also seem to play an important role in offsetting the adverse effects of economic shocks, especially in developed provinces.     

What influences banks’ choice of credit risk management practices? Theory and evidence

Banks use different risk management practices with varying levels of sophistication. This paper examines the factors that determine the choice of risk-management practices. In a theoretical model, we identify two main determinants for the choice of risk management tools: bank competition and sector concentration in the loan market. We empirically test the predictions of our model using hand-collected data on the credit risk management of 249 German savings banks. The results are in line with our theory: Competition pushes banks to implement advanced risk management practices. Sector concentration in the loan market promotes credit portfolio modeling, but it inhibits credit risk transfer.     

Reverse trade credit or default risk? Explaining the use of prepayments by firms

This paper provides a detailed empirical study on the use of advance payments by firms. It establishes that some trade credit theories can also be applied to prepayment. The results, obtained from a large panel dataset, suggest that a series of factors affect prepayments. First, financially stronger customers finance the production of their financially weaker suppliers. Second, advance payments also occur as a response to transaction risk in both domestic and international transactions. Finally, besides financial and warranty reasons, the trading partners' relative bargaining power influences payment terms as well.