A Credit Cycle Model of Bank Loans and Corporate Debt : a Bank Capital View (original) (raw)
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A Credit Cycle Model of Bank Loans and Corporate Bonds : A Bank Capital View
2017
This paper investigates macroeconomic effects of bank regulation in a continuoustime macro-finance framework with both bond-financing and bank-financing. Risky firms appreciate bank credit because banks are efficient at liquidating assets for troubled firms. However, risky firms must pay the risk premium for banks’ exposure to aggregate risks. Our framework captures the feature that the cost of bank-financing endogenously fluctuates and the fact that bond-financing is less volatile and cyclical than bank-financing. We show that if bank regulation is to raise the marginal funding cost for banks, these financial intermediaries transfer most of the incremental cost to their borrowers. Hence, risky firms switch to bond-financing due to the raised loan rate. Although financial stability improves, the average productivity declines. The impact of bank regulation on economic growth is unclear because more bond-financing leads to more inefficient liquidation. Overall, bank regulation benefit...
Business cycles, bank credit and crises
Economics Letters, 2013
• We develop a model of bank lending and risk taking in a dynamic context. • We argue that economic volatility can drive the dynamics and stability of credit.
Bank Assets, Liquidity and Credit Cycles
Journal of Economic Dynamics and Control
We study how bank collateral assets and their pledgeability a¤ect the amplitude of credit cycles. To this end, we develop a tractable model where bankers intermediate funds between savers and borrowers. If bankers default, savers acquire the right to liquidate bankers'assets. However, due to the vertically integrated structure of our credit economy, savers anticipate that liquidating …nancial assets (i.e., loans) is conditional on borrowers being solvent on their debt obligations. This friction limits the collateralization of bankers'…nancial assets beyond that of real assets (i.e., capital). In this context, increasing the pledgeability of …nancial assets eases more credit and reduces the spread between the loan and the deposit rate, thus attenuating capital misallocation as it typically emerges in credit economies à la Kiyotaki and Moore (1997). We uncover a close connection between the collateralization of bank loans, macroeconomic ampli…cation and the degree of procyclicality of bank leverage.
Bank Loans, Bonds, and Information Monopolies across the Business Cycle
The Journal of Finance, 2008
The tradeoff between arm's-length debt and bank debt is an integral part of the modern theory of corporate finance. Arm's-length debt suffers from free rider problems that prevent monitoring of the borrower. By being more concentrated, bank debt overcomes this problem, but then the private information which the bank gains through monitoring allows it to hold up the borrower. In this paper, we seek empirical evidence for this informational "hold-up" effect through a novel approach. Since firms are typically in greater danger of failure during recessions, it follows that banks that have an exploitable information advantage should be able to raise their rates in recessions by more than is justified by borrower default risk alone. To test this, we compare the pricing of bank loans for bank-dependent borrowers with the pricing of bank loans for borrowers with access to public debt markets both in good and bad times, controlling for a number of loan-and firm-specific factors. We find that firms that have issued public bonds in the past tend to pay lower spreads on their bank loans, all else equal; similarly, spreads tend to rise in recessions. Nevertheless, the interaction between these two variables has a negative effect on loan pricing: firms that have previously borrowed in the public bond markets pay lower spreads during recessions, all else equal. This finding is robust to a number of loan-and firm-specific controls and to the use of instruments for public debt market access. Our findings suggest that, during recessions, banks do in fact charge higher rates to customers with limited outside funding options. Finally, we find these magnitudes to be economically significant.
there has been a huge debate on the minimum capital level that is able to absorb credit risk, especially during a downturn. Using 10 largest banks in the UK, with the annual data from 2004 to 2013, this research examines the linkage among bank capital, bank liquidity, and the business cycle. Employing both dynamic and static models in line with other previous work,1 the literature gives evidence that financial institution health is profoundly affected by its capitalasset ratio, its liquidity, and business-cycle variables. The results show that adequate capital level will mitigate the extent of the financial shocks. The positive association between loan to deposit and changes in the gross domestic product implies that credit extension falls as the economy contracts.
Financial Crisis and the Supply of Corporate Credit
SSRN Electronic Journal, 2014
Analyzing syndicated loan and public debt originations by publicly traded U.S. firms between 2004 and 2011, we document a sharp migration from bank borrowing to either no borrowing or public debt issuance in the crisis years. A significant portion of the migration was driven by overall distress in the banking industry and a subsequent tightening of lending standards. To conserve liquidity, banks that were relatively more distressed curtailed credit further. Matching each firm with its lead bank, we provide direct evidence for the bank lending channel by showing the migration in debt funding outcomes was more prominent for firms that had established relationships with lead banks that became relatively more distressed during the crisis. The ability of many publicly traded firms to promptly disintermediate and issue their own debt provided important financial flexibility. The damage to the broader economy from the bank lending channel was large, nevertheless, potentially accounting for nearly two-thirds of the decline in 1 We are grateful for financial support from the Bank of America Research Fund, and to the Arkansas Bankers Association Chair funds, which sponsored access to Thompson Reuters DealScan and Global New Issues databases. We also thank seminar participants at the University
Firm-Bank Credit Network, Business Cycle and Macroprudential Policy
SSRN Electronic Journal, 2020
We present an agent-based model to study firm-bank credit market interactions in different phases of the business cycle. The business cycle is exogenously set and it can give rise to various scenarios. Compared to other models in this literature strand, we improve the mechanism according to which the dividends are distributed, including the possibility of stock repurchase by firms. In addition, we locate firms and banks over a space and firms may ask credit to many banks, resulting in a complex spatial network. The model reproduces a long list of stylized facts and their dynamic evolution as described by the cross-correlations among model variables. The model allows us to test the effectiveness of rules designed by the current financial regulation, such as the Basel 3 countercyclical capital buffer. We find that its effectiveness of this rule changes in different business cycle environments and this should be considered by policy makers.
Bond Finance, Bank Finance, and Bank Regulation
SSRN Electronic Journal, 2018
A dynamic general equilibrium model of bank regulation that omits bond financing is imprecise because such a model prevents firms from raising credit via alternative channels, and thus artificially lowers the price elasticity of demand for bank loans. In this paper, I build a continuous-time macrofinance model in which firms can use both bond credit and bank credit. Risky firms appreciate bank credit because banks are efficient at liquidating assets for troubled firms. However, risky firms must pay a risk premium for banks' exposure to aggregate risks. This paper shows that a model that does not allow for bond financing overestimates both the welfare benefits of tightening bank capital requirements and the rate at which the banking sector recovers after a recession. In addition, I show that the optimal bank regulation highly depends on the efficiency of the bankruptcy procedure in an economy and the risk profile of its real sector.
Stable financial system and liquidity creation are fundamental to economic growth. As a result of recent financial crisis, there has been huge debate on the minimum capital level that is able to absorb credit risk especially during downturn. The Basel III capital proposals have some very useful elements, notably a leverage ratio, a capital buffer and the proposal to deal with pro-cyclicality through dynamic provisioning based on expected losses. Using 10 largest banks in the UK, with the annual data from 2004 to 2013, this research examines the link between bank capital, liquidity and business cycle. Employing both dynamic and static model which is devoid other previous work, the result shows that adequate capital level will mitigate the extent of the financial shocks. The positive association between loan to deposit and changes in the gross domestic product implies that credit extension falls as the economy contract.