A strong dollar has been associated with lower lending to emerging markets and tighter global financial conditions. This paper documents similar patterns for credit in the U.S. economy: when the U.S. ...broad dollar index appreciates by 1 percent, U.S. banks’ corporate loan originations fall by 4.5 percent, with banks tightening credit standards and lending to safer borrowers. This negative correlation, which we term the U.S. dollar credit channel, is at least in part driven by institutional investors, who reduce their demand for risky loans on the secondary loan market when the dollar appreciates. As it becomes harder to sell loans to these investors, banks lend less.
Economic Uncertainty and Bank Lending WU, WEI‐SHAO; SUARDI, SANDY
Journal of money, credit and banking,
December 2021, Volume:
53, Issue:
8
Journal Article
Peer reviewed
This paper shows that economic uncertainty proxied by the variance risk premium (VRP) has an important explanatory power for bank credit supply and demand. Higher VRP exerts a negative influence on ...both loan demand and supply, increases loan spreads, reduces loan size and maturity, and increases the proportion of collateralized loans. These effects are substantive in the syndicated loan market and are worse off during economic recessions. Upon isolating the effect of uncertainty on bank credit supply from loan demand, we find that VRP dominates credit supply, which suggests that bank credit shortages can potentially aggravate economic downturn during recessions.
We explore whether transparency in banks' securitization activities enhances loan quality. We take advantage of a novel disclosure initiative introduced by the European Central Bank, which requires, ...as of January 2013, banks that use their asset-backed securities as collateral for repo financing to report securitized loan characteristics and performance in a standardized format. We find that securitized loans originated under the transparency regime are of better quality with a lower default probability, a lower delinquent amount, fewer days in delinquency, and lower losses upon default. Additionally, banks with more intensive loan level information collection and those operating under stronger market discipline experience greater improvement in their loan quality under the new reporting standards. Overall, we demonstrate that greater transparency has real effects by incentivizing banks to improve their credit practices.
This study provides empirical evidence on the impact of quantitative easing on credit standards and systemic risk in Japanese banks. Quantitative easing leads to softened credit standards of ...approving loan applications. Bank systemic risk, however, decreases following the expansion of asset purchase programmes.
•Macro and micro empirical evidence on the impact of quantitative easing in Japan.•Quantitative easing leads to softened credit standards of approving loan applications.•Quantitative easing reduces Japanese bank systemic risk.
VAR analysis on a measure of bank lending standards collected by the Federal Reserve reveals that shocks to lending standards are significantly correlated with innovations in commercial loans at ...banks and in real output. Credit standards strongly dominate loan rates in explaining variation in business loans and output. Standards remain significant when we include various proxies for loan demand, suggesting that part of the standards fluctuations can be identified with changes in loan supply. Standards are also significant in structural equations of some categories of inventory investment, a GDP component closely associated with bank lending. The estimated impact of a moderate tightening of standards on inventory investment is of the same order of magnitude as the decline in inventory investment over the typical recession.
Display omitted
•We link senior banks loan officers’ responses regarding their decisions for bank credit standards.•We examine the relationship between bank credit standards (CS) and perceived and ...actual financial crisis.•We also investigate whether the notion of the self-fulfilling prophecy is applicable in the case of the 2008 financial crisis.•We find that both perceived and actual financial crisis affect senior bank loan officers’ credit standards, with the actual crisis having the greatest impact.•Finally, we find sufficient evidence to support the Self-Fulfilling Prophecy notion.
We link senior banks loan officers’ responses regarding their decisions for bank credit standards, from successive surveys from the European Bank Lending Survey to investigate two important issues. First, we examine the relationship between bank credit standards (CS) and perceived and actual financial crisis. Second, we investigate whether the notion of the self-fulfilling prophecy is applicable in the case of the 2008 financial crisis. In particular, the second main research question that we try to answer is whether the perceived crisis (as implied by the Google search query “financial crisis”) contributed to the acceleration of the outburst of the actual crisis. We find that both perceived and actual financial crisis affect senior bank loan officers’ credit standards, with the actual crisis having the greatest impact. These results are consistent both in the short and in the long run. Finally, by putting forward a binary choice model we find sufficient evidence to support the Self-Fulfilling Prophecy notion.
Widespread empirical evidence shows that credit standards fluctuate over the business cycle. We build a macroeconomic model in which countercyclical lending standards emerge as an equilibrium ...outcome. In the model, banks compete on lending rates as well as collateral requirements. The presence of lending relationships between firms and banks gives rise to endogenous fluctuations in interest rate margins and collateral requirements. We demonstrate that endogenous credit standards amplify business cycles, driving up output volatility by around 25% when compared to a model without lending relationships. Finally, we show that in order to combat the effects of endogenous credit standards on macroeconomic volatility, a countercyclical loan-to-value ratio is an effective macroprudential policy tool.
We employ quarterly credit standards data from the Bank Lending Survey, covering 14 EU countries for the period 2003 Q1 to 2016 Q1. By linking consecutive surveys and utilizing loan officers' ...responses regarding actual and expected credit standards, we set out to investigate which expectations formation mechanism best describes loan officers' expectations. According to our findings, bank loan officers' expectations are compatible with the adaptive expectations mechanism.
Empirical evidence demonstrates that credit standards, including lending margins and collateral requirements, move in a countercyclical direction. In this study, we construct a small open economy ...model with financial frictions to generate the countercyclical movement in credit standards. Our analysis demonstrates that countercyclical fluctuations in credit standards work as an amplifier of shocks to the economy. In particular, the existence of endogenous credit standards increases output volatility by 21%. We also suggest three alternative tools for policymakers to dampen the effects of endogenous credit standards on macroeconomic volatility. First, the introduction of credit growth to the monetary policy succeeds in counteracting the fluctuation of lending, and thus decreasing the additional volatility considerably. Second, the exchange rate augmented monetary policy, if well-constructed, is considered an efficient tool to eliminate most of the additional fluctuations caused by deep habits in the banking sector. Finally, the introduction of the foreign interest augmented policy also proves successful in dampening the effect of endogenous movements in lending standards.
PDF
