The impact of credit conditions on market liquidity – a case for European stock markets

The recent financial crisis has drawn the attention of researchers and regulators to the importance of liquidity for stock market stability and efficiency. The ability of market-makers and investors to provide liquidity is constrained by the willingness of financial institutions to supply funding capital. This paper sheds light on the liquidity linkages between the Central Bank, Monetary Financial Institutions and market-makers as crucial elements to the well-functioning of markets. Results suggest the existence of causality between credit conditions and stock market liquidity for the Eurozone between 2003 and 2015. Similar evidence is found for the UK during the post-crisis period. Keywords: stock

The distribution of debt across euro area countries : The role of individual characteristics, institutions and credit conditions. National Bank of Belgium Working Paper No. 252, December 2013

The aim of this paper is twofold. First, we present an up-to-date assessment of the differences across euro area countries in the distributions of various measures of debt conditional on household characteristics. We consider three different outcomes: the probability of holding debt, the amount of debt held and, in the case of secured debt, the interest rate paid on the main mortgage. Second, we examine the role of legal and economic institutions in accounting for these differences. We use data from the first wave of a new survey of household finances, the Household Finance and Consumption Survey, to achieve these aims. We find that the patterns of secured and unsecured debt outcomes vary markedly across countries. Among all the institutions considered, the length of asset repossession periods best accounts for the features of the distribution of secured debt. In countries with longer repossession periods, the fraction of people who borrow is smaller, the youngest group of households borrow lower amounts (conditional on borrowing), and the mortgage interest rates paid by low-income households are higher. Regulatory loan-to-value ratios, the taxation of mortgages and the prevalence of interest-only or fixed-rate mortgages deliver less robust results.

Consumer Expertise or Credit Risk? An empirical analysis of mortgage pricing

Loan mortgage interest rates are usually the result of a bank-customer negotiation process. Credit risk, consumer cross-buying potential, bundling, financial market competition and other features affecting the bargaining power of the parties could affect price. We argue that, since mortgage loan is a complex product, consumer expertise could be a relevant factor for mortgage pricing. Using data on mortgage loan prices for a sample of 1055 households for the year 2005 (Bank of Spain Survey of Household Finances, EFF-2005), and including credit risk, costs, potential capacity of the consumer to generate future business and bank competition variables, the regression results indicate that consumer expertise-related metrics are highly significant as predictors of mortgage loan prices. Other factors such as credit risk and consumer cross-buying potential do not have such a significant impact on mortgage prices. Our empirical results are affected by the credit conditions prior to the financial crisis and could shed some light on this issue.

The Impact of Extension and Ecosystem Services on Smallholders’ Credit Constraint.

On formal credit markets, access to formal credit and reasonable credit terms of smallholder farmers
in rural sub-Saharan Africa is limited due to adverse selection. Financial institutions operating in
rural areas often cannot distinguish between borrowers (farmers) that are creditworthy and those that
are not, thus, allocate limited resource to agriculture to reduce credit risk. In the presence of limited business quality signaling by smallholder farmers, financial institutions shall demand for collateral and/or offer unfavorable contract terms. Moreover, agricultural productivity of rural sub-Saharan
Africa, dominated by subsistence or small-scale farmers, is also negatively impacted by the adverse
effect of climate change. A strategy that may make the farming practices of smallholder farmer’s
climate resilient and profitable may also improve smallholder farmer's access to formal credit. This
study investigates to what extent participating in ecosystem and extension services (EES) programs
signals business quality of smallholders, thus granting them credit accessibility. We collected data
on 210 smallholder farmers in 2013, comprising farmers that receive payments for ecosystem
services (PES) and farm management training from the International Small Group Tree Planting
Program (TIST) Kenya to test the aforementioned theory empirically. We use game theory,
particularly a screening and sorting model, to illustrate the prospects for farmers with EES to access
formal credit and to improve their credit terms given that they receive PES and banking services
training. Furthermore, the PES’ long term duration (10 – 30 years) generates stable cash-flow which
may be perceived as collateral substitute. Results suggest that smallholder farmers in the TIST
program were less likely to be credit constraint compared to non-TIST farmers. Distance to market,
education, livestock and farm income are factors that determine access to credit from microfinance
institutions in rural Kenya. Amongst farmers that have obtained loans, those keeping business records
enjoy more favorable formal credit conditions. These farmers were observed to pay ca. 5 percent less
interest rate in microfinance charges. For TIST farmers, this type of farm management practices may
be attributed to the banking services and other training they receive within the program. While the
availability of classical collateral (farmlands) and PES may reduce interest rate, the latter was found
to be statistically insignificant. This research underlines the importance of an effective extension
services in rural areas of developing countries and the need to improve gains from conservation
agriculture and ensuing PES. The benefits associated with EES and PES may encompass agricultural
financing.

Macroeconomic Risk Factors and the Role of Mispriced Credit in the Returns from International Real Estate Securities

The benefits of diversification from international real estate securities are generally well established. However, the drivers of international real estate securities returns are insufficiently understood. We jointly examine the empirical implications of three major international asset pricing models that account for broad macroeconomic risk factors. In addition, we develop the hypothesis that an indicator of mispriced credit is significant in explaining the time series variation in international real estate securities returns. We employ the returns generated by a large sample of firms from 20 countries over the period 1999 to 2011 to test our hypothesis. We find support for the predictions of the major international asset pricing models. We also find evidence in favour of our hypothesised link between local credit conditions and the performance of international real estate securities.

Housing supply in Australia : the impact of the availability of development finance

Before the Global Financial Crisis many providers of finance had growth mandates and actively pursued development finance deals as a way of gaining higher returns on funds with regular capital turnover and re-investment possible. This was able to be achieved through high gearing and low presales in a strong market. As asset prices fell, loan covenants breached and memories of the 1990’s returned, banks rapidly adjusted their risk appetite via retraction of gearing and expansion of presale requirements. Early signs of loosening in bank credit policy are emerging, however parties seeking development finance are faced with a severely reduced number of institutions from which to source funding. The few institutions that are lending are filtering out only the best credit risks by way of constrictive credit conditions including: low loan to value ratios, the corresponding requirement to contribute high levels of equity, lack of support in non-prime locations and the requirement for only borrowers with well established track records. In this risk averse and capital constrained environment, the ability of developers to proceed with real estate developments is still being constrained by their inability to obtain project finance. This paper will examine the pre and post GFC development finance environment. It will identify the key lending criteria relevant to real estate development finance and will detail the related changes to credit policies over this period. The associated impact to real estate development projects will be presented, highlighting the significant constraint to supply that the inability to obtain finance poses.

Análise comparativa entre a promoção para arrendamento e venda de imóveis de habitação

Dissertação para obtenção do grau de Mestre em Engenharia Civil na Área de Especialização de Edificações

Cointegração e price discovery do risco soberano brasileiro

A lei do preço único afirma que o mesmo ativo negociado em diferentes mercados deve apresentar preços equivalentes. Este trabalho busca verificar se o risco de crédito soberano brasileiro negociado no mercado internacional é precificado de forma semelhante tanto nos tradicionais mercados de títulos quanto no novo e crescente mercado de derivativos de crédito. Adicionalmente, utiliza-se a análise de Price Discovery para examinar qual dos mercados se move mais rapidamente em resposta às mudanças nas condições de crédito da economia brasileira. A análise empírica é feita por meio de modelos de séries de tempo, mais especificamente análise de cointegração e vetor de correção de erros. Os resultados confirmam a predição teórica da lei do preço único de que o risco de crédito brasileiro, tanto nos mercados de títulos quanto no mercado de derivativos de crédito, movem-se juntos no longo prazo. Por fim, a maior parte do Price Discovery ocorre no mercado de derivativos de crédito.

O canal de crédito na transmissão de política monetária: evidências para o Brasil

Este trabalho traz avaliação empírica a respeito do canal de crédito no Brasil, feita com base no artigo de Holtemöller (2002). Para tanto, foi feita análise descritiva sobre a evolução do crédito no país, bem como testes econométricos utilizando dados monetários, de crédito e economia real. Observamos o aumento da importância do crédito nos últimos anos, assim como o aumento do endividamento corporativo via emissão de títulos. Portanto, seria natural esperar que o canal de crédito no mecanismo de transmissão da política monetária também se tornasse mais importante. Contudo, a análise empírica mostra que seus efeitos sobre a atividade econômica são limitados. Após estimações feitas para o canal monetário tradicional, a partir de vetores autorregressivos estruturais (SVAR) com vetores de correção de erros (VEC), incluímos variáveis de crédito para avaliar o impacto sobre o produto. Apesar de concluirmos que choques de política monetária possuem efeitos sobre a oferta de crédito, o impacto de condições creditícias restritivas sobre a produção industrial é pequeno. Alguns fatores como a existência de crédito corporativo direcionado via BNDES, maior importância da captação via mercado de capitais, medidas macroprudenciais adotadas e aumento do prazo médio concorrem para esse resultado.

Três ensaios sobre política monetária e crédito

In the first essay, "Determinants of Credit Expansion in Brazil", analyzes the determinants of credit using an extensive bank level panel dataset. Brazilian economy has experienced a major boost in leverage in the first decade of 2000 as a result of a set factors ranging from macroeconomic stability to the abundant liquidity in international financial markets before 2008 and a set of deliberate decisions taken by President Lula's to expand credit, boost consumption and gain political support from the lower social strata. As relevant conclusions to our investigation we verify that: credit expansion relied on the reduction of the monetary policy rate, international financial markets are an important source of funds, payroll-guaranteed credit and investment grade status affected positively credit supply. We were not able to confirm the importance of financial inclusion efforts. The importance of financial sector sanity indicators of credit conditions cannot be underestimated. These results raise questions over the sustainability of this expansion process and financial stability in the future. The second essay, “Public Credit, Monetary Policy and Financial Stability”, discusses the role of public credit. The supply of public credit in Brazil has successfully served to relaunch the economy after the Lehman-Brothers demise. It was later transformed into a driver for economic growth as well as a regulation device to force private banks to reduce interest rates. We argue that the use of public funds to finance economic growth has three important drawbacks: it generates inflation, induces higher loan rates and may induce financial instability. An additional effect is the prevention of market credit solutions. This study contributes to the understanding of the costs and benefits of credit as a fiscal policy tool. The third essay, “Bayesian Forecasting of Interest Rates: Do Priors Matter?”, discusses the choice of priors when forecasting short-term interest rates. Central Banks that commit to an Inflation Target monetary regime are bound to respond to inflation expectation spikes and product hiatus widening in a clear and transparent way by abiding to a Taylor rule. There are various reports of central banks being more responsive to inflationary than to deflationary shocks rendering the monetary policy response to be indeed non-linear. Besides that there is no guarantee that coefficients remain stable during time. Central Banks may switch to a dual target regime to consider deviations from inflation and the output gap. The estimation of a Taylor rule may therefore have to consider a non-linear model with time varying parameters. This paper uses Bayesian forecasting methods to predict short-term interest rates. We take two different approaches: from a theoretic perspective we focus on an augmented version of the Taylor rule and include the Real Exchange Rate, the Credit-to-GDP and the Net Public Debt-to-GDP ratios. We also take an ”atheoretic” approach based on the Expectations Theory of the Term Structure to model short-term interest. The selection of priors is particularly relevant for predictive accuracy yet, ideally, forecasting models should require as little a priori expert insight as possible. We present recent developments in prior selection, in particular we propose the use of hierarchical hyper-g priors for better forecasting in a framework that can be easily extended to other key macroeconomic indicators.

Preliminary Overview of the Economies of Latin America and the Caribbean 2008

Includes bibliography

Major macroeconomic disturbances, expectations and policy responses

Includes bibliography

Capital flows to Latin America: fourth quarter 2002

Includes bibliography

Capital flows to Latin America: recent developments

Includes bibliography

Emergence of Financial Intermediaries in Electronic Markets: The Case of Online P2P Lending

We analyze the role of intermediaries in electronic markets using detailed data of more than 14,000 originated loans on an electronic P2P (peer-to-peer) lending platform. In such an electronic credit market, lenders bid to supply a private loan. Screening of potential borrowers and the monitoring of loan repayment can be delegated to designated group leaders. We find that these market participants act as financial intermediaries and significantly improve borrowers' credit conditions by reducing information asymmetries, predominantly for borrowers with less attractive risk characteristics. Our findings may be surprising given the replacement of a bank by an electronic marketplace.