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Since the early 1990s, there has been a very large growth in mortgages made by so-called subprime lenders, which specialize in lending to borrowers with credit history problems. One reason for concern about this trend is that it h...
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Since the early 1990s, there has been a very large growth in mortgages made by so-called subprime lenders, which specialize in lending to borrowers with credit history problems. One reason for concern about this trend is that it has been associated with a large and simultaneous rise in foreclosures, which can entail significant costs not just for those directly affected but also for surrounding neighborhoods and larger communities. This study uses multivariate estimations to quantify the impact of subprime lending on neighborhood foreclosure levels. After controlling for neighborhood demographics and economic conditions, the authors find that subprime loans lead to foreclosures at far greater rates than do prime loans. Moreover, subprime lending appears to account for a substantial share of foreclosure activity in high-foreclosure neighborhoods.
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Relationship lending is a common lending technology that is assumed to bring several benefits to small-medium enterprises (SMEs) and to financial institutions that adopt it. Notably, it could reduce information asymmetries, permit...
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Relationship lending is a common lending technology that is assumed to bring several benefits to small-medium enterprises (SMEs) and to financial institutions that adopt it. Notably, it could reduce information asymmetries, permitting banks to offer better credit terms to the borrower. However, it also entails some costs for both sides. The empirical evidence so far has not been conclusive in determining under what conditions relationship lending can be beneficial or harmful. Most of the studies suggest that SMEs that engage in relationship lending benefit from more credit availability (especially during a financial crisis), and lower interest rates. This occurs when they are served by small banks, are geographically close to the lender, when the bank is adequately decentralized and when it is the dominant creditor of the firm. However, under certain circumstances, banks can extract rents from the borrower or be captured by him. In addition, the consequences and the future of relationship lending will be remarkably affected by the level of competition among banks, their ownership structure, the regulatory framework and the business model that banks will have to adopt accordingly.
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This article examines borrower acceptance in consumer marketplace lending using a unique dataset from the largest platform in Australia, Society One. Applications are initially filtered through an automated decision tree based on ...
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This article examines borrower acceptance in consumer marketplace lending using a unique dataset from the largest platform in Australia, Society One. Applications are initially filtered through an automated decision tree based on a third-party Veda (Equifax) credit score. At the second stage of assessment, loan applications are underwritten by the platform before being offered to sophisticated investors for purchase. The platform accepts around 11% of completed applications, with around 55% declined by an automated decision process and the remaining 34% by the manual underwriting process. More than 80% of purchased loans were made to borrowers with credit scores classed as ‘Good’, ‘Very Good’ or ‘Excellent’ (the threshold for ‘Good’ being a score of 622). However, underwriters decline around two-thirds of these higher credit score applicants, showing the importance of the underwriting process to the platform’s growth.JEL Classification: G21, G23, D14, D45, D82.
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The cyclical movement of housing prices likely affects the supply of and demand for credit for home purchases, but little is known about how this process might influence differential access to credit between minority and non-minor...
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The cyclical movement of housing prices likely affects the supply of and demand for credit for home purchases, but little is known about how this process might influence differential access to credit between minority and non-minority borrowers. This paper uses data reported through the Home Mortgage Disclosure Act (HMDA) over the period 1990-2013 to estimate the relationship between annual metropolitan area-level house price inflation and the extent to which Black borrowers are denied relative to 'comparable' White borrowers on their loan applications. The results indicate that, on average, Black borrowers are denied more frequently than White borrowers, but this difference in denial rates decreases significantly as house prices rise more rapidly. Such results demonstrate the importance of considering local housing market conditions when using HMDA data to assess lender compliance with fair lending laws. Published by Elsevier Inc.
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Using empirical default probabilities and profitability distributions, a simulation model is developed to identify the long-term value of relationships among differing credit rating and loan amount groups. According to the results...
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Using empirical default probabilities and profitability distributions, a simulation model is developed to identify the long-term value of relationships among differing credit rating and loan amount groups. According to the results generated from a setof lending relationships, agricultural lenders are pricing low and moderate credit rating customers such that similar long-term values are found among the groups. Also, large loan amount relationships generate more dollars of lifetime value. The large relationships, however, earn fewer dollars of lifetime value per dollar of loan amount among risk peers. Implications are also drawn for the retention rates of existing customers.
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Do tightenings of bank lending standards permanently reduce bank lending? We construct a measure of a bank's level of lending standards using micro-data from the sample of banks participating in the Eurosystem Bank Lending Survey ...
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Do tightenings of bank lending standards permanently reduce bank lending? We construct a measure of a bank's level of lending standards using micro-data from the sample of banks participating in the Eurosystem Bank Lending Survey in The Netherlands and show that this level measure affects business lending. The level effect is statistically robust and economically relevant; a one point tightening reduces a bank's quarterly growth rate of business lending by about half a percentage point until bank lending standards are eased. This level effect of bank lending standards helps to explain low bank lending growth after a period of prolonged tightening as well as high bank lending growth in a period of prolonged easing. As such, the analysis provides another potential indicator for macroprudential policy. (C) 2016 Elsevier B.V. All rights reserved.
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Effective control of non-performing assets (NPAs) is critical for sustainable and healthy growth in the banking sector of any economy. In this paper we attempt to establish a possible connection between the problems of loan non-re...
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Effective control of non-performing assets (NPAs) is critical for sustainable and healthy growth in the banking sector of any economy. In this paper we attempt to establish a possible connection between the problems of loan non-repayment in the formal credit market and credit accessibility from informal sources in India. The latter appears to flourish in many developing countries despite various government-initiated formal lending programs. Scholars often examine how poorer households become the victim of usurious interest rates charged by informal lenders and thereby lose their valuable securities. Our approach, however, suggests that the more unfavorable the terms of loan from an informal moneylender compared with a formal lending agency, the better are the chances of a borrower making a timely repayment, and thus obtaining the benefits of a formal loan on a recurring basis (which is not available in the case of default). The paper uses the National Sample Survey Organization database (59(th) round, All India Debt and Investment Survey) to empirically examine the impact of interest rate in the informal sector on formal sector repayment. In addition to revealing a positive and significant impact of the informal sectors interest rate on the repayment of formal loans, the empirical analysis reveals a plausible negative impact of expectation regarding a loan waiver, as well as the moral hazard problem faced by formal lending agencies.
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We exploit the 2011 EBA Capital exercise, a quasi-natural experiment that required a number
of banks to increase their regulatory capital. This experiment makes secured lending
for the affected banks more attractive vis-à-vis u...
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We exploit the 2011 EBA Capital exercise, a quasi-natural experiment that required a number
of banks to increase their regulatory capital. This experiment makes secured lending
for the affected banks more attractive vis-à-vis unsecured lending, because secured loans
require less regulatory capital. Using loan-level data covering the universe of bank loans
in Portugal, we identify how banks require collateral on new loans when facing higher
capital requirements: relative to the control group, treated banks require loans to be collateralized
more often after the shock. We find the affected banks partially shield their
relationship borrowers. The increased collateralization also has economically relevant real
effects. Treated banks reallocate funds towards sectors with greater asset tangibility. Firms
and sectors borrowing to a greater degree from treated banks exhibit lower growth and
tilt their investments towards tangible assets.
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This paper studies the effect of trust on bank lending using a sample of commercial banks in 34 countries around the world. We distinguish between two forms of trust: In-group trust, which we define as the trust in people we know,...
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This paper studies the effect of trust on bank lending using a sample of commercial banks in 34 countries around the world. We distinguish between two forms of trust: In-group trust, which we define as the trust in people we know, and Out-group trust, which we define as the trust in people we meet for the first time. We find that Out-group trust is positively and significantly associated with bank lending. A closer look shows that this ef-fect only holds in countries with relatively lower levels of formal institutional and judicial development. As for In-group trust, we find that its influence on bank lending is depen-dent on the level of informal lending available in each country. Overall, this paper provides novel evidence on the importance of trust and the different mechanisms by which it in-fluences bank lending around the world. (c) 2023 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY license ( http://creativecommons.org/licenses/by/4.0/ )
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Purpose - The purpose of this paper is to apply a capability perspective to investigate the shift from relationship lending to transaction lending in a bank's corporate segment. The authors investigate the impact of three operatio...
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Purpose - The purpose of this paper is to apply a capability perspective to investigate the shift from relationship lending to transaction lending in a bank's corporate segment. The authors investigate the impact of three operational capabilities: assisting corporate clients in funding and business operations, management of customer relationships and internal cooperation on performance in relationship and transaction lending. Design/methodology/approach - The primarily empirical material comprises longitudinal survey data, collected on three occasions during the period 1998 throughout 2001 from one of Sweden's largest banks. Data are analyzed using factor analysis and OLS regression. Findings - Results show that the effects of the three capabilities are contingent on the type of lending strategy: In relationship lending, assisting corporate clients has no significant direct effect on performance; however, it has an indirect effect on performance via the management of customer relationships. In transaction lending, assisting corporate clients has a direct effect on performance, and this effect becomes stronger as the transaction strategy is further implemented. The results also show that the direct effect of the management of customer relationships and cooperation on performance is significant in both strategies; however, the relation is stronger in relationship lending compared with transaction lending. Originality/value - The findings indicate that the choice of lending strategy is more complex than a choice between a strict relationship strategy and a strict transaction strategy and that a strategy that leads to competitive advantage includes elements of both strategies.
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