Michalis Haliassos, 19 May 2017

The 2017 CEPR European Workshop on Household Finance took place on 28-29 April 2017 at the Copenhagen Business School. This column introduces the CEPR Network on Household Finance and its goals, and also describes the papers that were presented at the workshop.

Franziska Ohnsorge, Shu Yu, 16 May 2017

Since the Global Crisis, private credit has risen sharply in several emerging market and developing economies as well as advanced economies. This column examines the role of investment alongside these credit booms, and how output growth has been affected. These booms have been unusually ‘investment-less’ in comparison to previous episodes, which were accompanied by investment surges. The absence of investment surges during credit booms is accompanied by lower growth, especially once the credit boom unwinds.

Manthos Delis, Iftekhar Hasan, Steven Ongena, 22 February 2017

The positive relationship between democratic development and economic outcomes is well established. Using three decades of international data, this column identifies a new channel for this effect – the cost of credit to corporations. It also analyses loan pricing in Turkey to reveal a substantial rise in the average cost of lending after the attempted coup d’etat in July 2016. Together, these results highlight how efficiency in loan pricing results in a comparative advantage for firms in democratic countries over those in less democratic or authoritarian countries.

Federico Cingano, Francesco Manaresi, Enrico Sette, 24 June 2016

Negative shocks to bank balance sheets are problematic not just for financial markets, but for employment and economic growth more widely. This column uses evidence on a bank liquidity shock in Italy in 2007-10 to show the impact on firms’ production, investment, and employment. Firms borrowing from banks with a high exposure to the shock experienced a more intense fall both in credit flows and in investment expenditure. While the credit cut has been homogeneous across borrowers, firms with easier access to external finance were able to contain the negative consequences of the drop in credit for investment.

Jaap Bos, Ralph De Haas, Matteo Millone, 22 March 2016

Screening loan applicants is a key principle of sound banking, but it can be challenging when trustworthy information about applicants is not available. Many countries have therefore introduced credit registries that require banks to share borrower information. This column examines how the introduction of a new registry affected the functioning of the credit market in Bosnia and Herzegovina. Mandatory information sharing allowed loan officers to lend more conservatively at both the extensive and intensive margins. The improved credit allocation improved loan quality and lender profitability.

Adair Turner, 19 March 2016

Prior to the Global Crisis, modern macroeconomics largely ignored the details of the financial system, and favoured mathematical precision and elegance at the expense of realism. So argues Adair Turner in this Vox Talk. He also explains the key arguments in his book, ‘Between Debt and the Devil: Money, Credit and Fixing Global Finance’: that most credit is not needed for economic growth but rather drives real estate booms and busts; and that sometimes it’s better to print your way out of financial crises.    

Jean-Marie Baland, Rohini Somanathan, Lore Vandewalle, 07 February 2016

The benefits of microfinance are in the details. This column takes a look at commercial bank lending to Indian self-help groups – smaller, informal community-based groups – as a new and successful microfinance initiative. Different ways of thinking about getting credit to the poorest and most marginalised in society can work, but only if the institutions are properly geared up for their customers.

Chun Chang, Kaiji Chen, Daniel Waggoner, Tao Zha, 01 August 2015

China’s spectacular growth over the 2000s has slowed since 2013. The driving force behind the country’s growth was investment, so the key to understanding the slowdown lies in understanding what sustained investment in the past. This column shows how a preferential credit policy promoting heavy industrialisation explains the trends and cycles in China’s macroeconomy over the past two decades. This policy was not without negative consequences, particularly in terms of the distortions it introduced for business finance. Going forward, China needs to focus on creating the right incentives for banks to make loans to small productive businesses.

Philippe Karam, Ouarda Merrouche, Moez Souissi, Rima Turk, 02 February 2015

In the wake of the Crisis, policymakers have introduced liquidity regulation to promote the resilience of banks and lower the social cost of crisis management. This column shows that a funding liquidity shock, manifested as lower access to wholesale sources of funding following a credit rating downgrade, translates into a significant decline in both domestic and foreign lending. Liquidity self-insurance by banks mitigates the impact of a credit rating downgrade on lending.

James Wang, 30 December 2014

Many lenders hire loan officers to screen soft information that may otherwise be ignored by credit scoring. However, in addition to their compensation costs, loan officers may have characteristics, such as being overly cautious, that could distort their decisions. This column documents the performance of loan officers using data from a Chinese lender. Despite the distortions, the loan officers contribute three times their pay in annual profits above what the lender could have earned by itself, even with the benefit of hindsight.

Kuniyoshi Saito, Daisuke Tsuruta, 14 November 2014

In Japan, loans with 100% guarantees account for more than half of all loans covered by public credit guarantee schemes, but banks claim that they do not offer loans without sufficient screening and monitoring even if the loans are guaranteed. This column presents evidence of adverse selection and moral hazard in Japanese credit guarantee schemes. The problem is less severe for loans with 80% guarantees.

Pierluigi Bologna, Arianna Miglietta, Marianna Caccavaio, 14 October 2014

Following the financial crisis, European banks have taken steps to revise unsustainable business models by deleveraging. By this metric they have made substantial progress – but this column argues that improper management of the deleveraging process may threaten the recovery. The authors find that equity increases played a much larger role than asset decreases, and recommend increasing the disposal of bad assets.

Fergal McCann, Tara McIndoe-Calder, 23 September 2014

The role of credit-fuelled property booms in the Global Crisis has received much high-profile attention in recent years. Using data on Irish small and medium enterprises, this column highlights an additional channel through which such booms can impact post-crisis growth. Firms having difficulty repaying their property-related debts divert resources away from hiring and investment. Property booms thereby induce misallocation of resources in both the boom and the bust.

Nicola Gennaioli, Alberto Martin, Stefano Rossi, 19 July 2014

There is growing concern – but little systematic evidence – about the relationship between sovereign default and banking crises. This column documents the link between public default, bank bondholdings, and bank loans. Banks hold many public bonds in normal times (on average 9% of their assets), particularly in less financially developed countries. During sovereign defaults, banks increase their exposure to public bonds – especially large banks, and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults.

Alberto Martin, Jaume Ventura, 05 July 2014

There is a widespread view among macroeconomists that fluctuations in collateral are an important driver of credit booms and busts. This column distinguishes between ‘fundamental’ collateral – backed by expectations of future profits – and ‘bubbly’ collateral – backed by expectations of future credit. Markets are generically unable to provide the optimal amount of bubbly collateral, which creates a natural role for stabilisation policies. A lender of last resort with the ability to tax and subsidise credit can design a ‘leaning against the wind’ policy that replicates the ‘optimal’ bubble allocation.

Neil Kay, Gavin Murphy, Conor O'Toole, Iulia Siedschlag, Brian O'Connell, 29 June 2014

Small and medium-size enterprises (SMEs) often report difficulties in obtaining external finance. Based on new research, this column argues that these difficulties are not due to greater financial risks associated with SMEs. Instead, they are the result of imperfections in the market for external finance that negatively affect smaller and younger enterprises. The same research has shown that these types of firms are also the most reliant on external finance to support their investment and growth.

Joseph Noss, Priscilla Toffano, 06 April 2014

The impact of tighter regulatory capital requirements during an economic upswing is a key question in macroprudential policy. This column discusses research suggesting that an increase of 15 basis points in aggregate capital ratios of banks operating in the UK is associated with a median reduction of around 1.4% in the level of lending after 16 quarters. The impact on quarterly GDP growth is statistically insignificant, a result that is consistent with firms substituting away from bank credit and towards that supplied via bond markets.

Francesco Pappadà, Yanos Zylberberg, 03 February 2014

Greece’s austerity package included an unprecedented increase in the VAT rate, but the resulting increase in revenue was much lower than expected. This column links this disappointing result to the ‘transparency response’ of firms to higher tax rates. In countries like Greece with poor tax monitoring, firms face a tradeoff when deciding whether to declare their activity. Transparency is a necessary condition for accessing external finance, but it also means having to pay tax. Improving credit conditions for small and medium-size Greek firms might shift this tradeoff in favour of transparency.

Erik Feyen, Ines Gonzalez del Mazo, 12 May 2013

Before the global financial crisis, European banks had rapidly expanded their foreign-lending activities. However, this column argues that financial stress in Europe has put this process into reverse and negatively affected credit conditions in developed and emerging markets alike. As European banks repair their balance sheets and rethink their business models in a context of stricter regulatory requirements, financial fragmentation, and a deteriorating European economy, they continue to retrench to home markets.

Moritz Schularick, Alan Taylor, 24 October 2012

Is the sluggish growth we see in the North Atlantic economies normal? This column updates the authors’ 5 October 2012 column to include an analysis of the UK. The original column looks at 14 advanced economies over the past 140 years and shows that larger credit booms during expansions have been systematically associated with more severe and prolonged slumps. Measured against the historical benchmark, the recent US recovery has been far better than could have been expected. The same cannot be said of the UK’s growth performance.