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Real Effects of Lending Arrangements

Paper Session

Saturday, Jan. 5, 2019 8:00 AM - 10:00 AM

Hilton Atlanta, 305
Hosted By: International Banking, Economics, and Finance Association
  • Chair: John V. Duca, Oberlin College

Price Dynamics and the Financing Structure of Firms in Emerging Economies

Alan Finkelstein Shapiro
,
Tufts University
Andrés Gonzalez Gomez
,
Bank of the Republic
Victoria Nuguer
,
Inter-American Development Bank (IADB)
Jessica Roldan Pena
,
Bank of Mexico

Abstract

We use a novel dataset that merges goods-level prices underlying the CPI in Mexico with the balance sheet information of Mexican publicly listed firms and study the connection between firms' financing structure and price dynamics in an emerging economy. First, we find that larger firms (in terms of sales and employees) tend to use more interim trade credit relative to bank credit. Second, these firms use interfirm trade credit as a mechanism to smooth variations in their prices. Third, all else equal, firms with a higher trade-to-bank credit ratio tend to lower prices. In turn, the behavior of these firms explains the negative relationship between aggregate trade credit growth and inflation in the data. A tractable New Keynesian model with search frictions in physical input markets sheds light on firms' structural characteristics as well as the economic mechanisms that rationalize our empirical findings.

Financial Access Under the Microscope

Sumit Agarwal
,
National University of Singapore
Thomas Kigabo
,
National Bank of Rwanda
Camelia Minoiu
,
Federal Reserve Board
Andrea Presbitero
,
International Monetary Fund
Andre F. Silva
,
Federal Reserve Board

Abstract

We examine the impact of a large-scale microcredit expansion program on financial access and the transition of previously unbanked borrowers to commercial banks. Administrative data on the universe of loans to individuals show that the program improved access to credit, especially in underdeveloped areas. A sizeable share of first-time borrowers who need a second loan switch from microfinance institutions to commercial banks, which cream-skim low-risk borrowers and grant them larger, cheaper, and longer-term loans. These borrowers are not riskier than those already at commercial banks. The microfinance sector, together with well-functioning credit reference bureaus, help mitigate information frictions in credit markets.

To Ask or Not To Ask? Collateral Versus Screening in Lending Relationships

Artashes Karapetyan
,
ESSEC Business School-France
Sudipto Karmakar
,
Banco de Portugal
Hans Degryse
,
KU Leuven and CEPR

Abstract

Using a comprehensive loan-level dataset, we study the impact of bank-firm relationships on collateral requirements both at the beginning of a relationship and over time. First, we exploit the EBA capital exercise, a quasi-natural shock that required increased capital requirements for a number of banking groups in the European Union. This experiment ceteris paribus makes secured lending cheaper vis-`a-vis unsecured lending for the affected banks, since secured loans require less regulatory capital. We find that relative to the control group, the affected banks engaged in more collateralized lending. However, we further find this effect is less pronounced for relationship borrowers. Second, extending the analysis to span nine years of data, we document that to loyal borrowers with long relationship potential, the bank is more likely to offer unsecured credit at the beginning of the relationship, complementing existing evidence that collateral requirements decline over the course of the relationship. The results suggest that relationship banking is important for alleviating credit access - both during hard times for banks, as well as at the beginning of borrowers' lives - especially for small, collateral-constrained businesses.

The Double-Edged Sword of Global Integration: Robustness, Fragility & Contagion in the International Firm Network

Everett Grant
,
Federal Reserve Bank of Dallas
Julieta Yung
,
Bates College

Abstract

We use daily equity returns to estimate global inter-firm networks across all major industries from 1981-2016 and test whether the network exhibits robust (beneficial) or fragile (harmful) behavior, relating multinational firms' overall health with global integration. More connected firms are less likely to be in distress and have higher profit growth and equity returns, but are also more exposed to direct contagion from distressed neighboring firms and network level crises. Our machine learning based analysis reveals the centrality of finance in the international firm network and increased globalization over time, with greater potential for crises to spread globally when they do occur.
Discussant(s)
Anton Korinek
,
University of Virginia
Felix Noth
,
Halle Institute for Economic Research
Allen N. Berger
,
University of South Carolina
Yalin Gunduz
,
Deutsche Bundesbank
JEL Classifications
  • G2 - Financial Institutions and Services
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy