The effect of borrower country financial system and corporate governance system types on the spread of syndicated loans

Purpose This study aims to analyse the effect of borrower’s countries on syndicated loan spreads, featuring countries according to institutional factors, namely, financial systems and corporate governance systems. Design/methodology/approach This study is an empirical investigation based on a unique sample of more than 85,000 syndicated loans from 122 countries. The paper uses standard and two-stage least squares regression analysis to test whether the types of financial and corporate governance systems affect loan spreads. Findings The paper finds that borrowers from countries with financial systems oriented towards the banking-based paradigm pay lower interest rate spreads than those from countries with financial systems oriented towards the market-based paradigm. In addition, there is evidence that borrowers from countries with more developed financial systems pay lower spreads. The results also show that borrowers from countries with an Anglo-Saxon governance system pay higher spreads than borrowers from countries with a Continental governance system. Research limitations/implications This study does not consider potential promiscuous relationships that can arise at the ownership structure and governance level between banks and borrowers and may affect loan spreads. Practical implications This study suggests that financial and corporate governance systems are essential factors in the financial intermediation process. Furthermore, the evidence indicates that corporates with higher potential agency costs and higher potential information asymmetry are requested to pay higher spreads. Therefore, the opportunities to such corporates invest optimally tend to be scarcer. Originality/value The paper highlights the impact of institutional factors on the cost of financing, characterising the countries according to the type of financial system and the type of corporate governance system. The study finds that borrowers from countries with bank-based financial systems pay lower interest rate spreads than those from countries with market-based financial systems. The paper also highlights how the level of financial development affects the cost of financing. The paper focusses on non-financial firms, unlike financial firms, which have been the focus of several empirical studies on topics relating to the cost of funding and corporate governance.

Rural development issue: a case study in Banyuwangi District, East Java Province

Rural people, as well as the farmers, deal with capital access for their business activities. Formal credit offered by the banks is not easily accessed by rural people due to rigid administrative procedures and collateral requirements. This paper aims to analyze rural people’s access to formal credit offered by a Credit Union (CU) acting as the credit cooperative in Banyuwangi District, East Java. The study was conducted in 2020 in Banyuwangi District. Primary and secondary data collected were analyzed using a descriptive approach. Each debtor has to become a member of CU prior to borrowing credit with some requirements, e.g. paying principle and regular contributions, sufficient saving value as collateral, and willingness to pay an interest rate determined for a certain period depending on credit types. Types of business financed by CU are farm business, fresh fruit marketing, cow fattening, groceries, among others. Most of the rural businesses financed by CU were able to pay the credit on time. Each business feasibility was assessed carefully by the CU management prior to credit approval and responded quickly. CU members also get the advantage through receiving shared-profit distributed annually. The CU copes with limited capital as the members’ demand for credit increases. The CU also has to compete with the relatively lower interest rate of the official subsidized credit, i.e. KUR (People’s Business Credit), for its credit expansion. The government needs to encourage CU to grow in rural areas for rural people’s credit access through policy facilitation.

The Impact of Relationship Lending on Bank Loan Process for Korean SMEs

We investigate the effects of the bank-firm relationships on the decision making process regarding loan application, loan approval, and loan interest rate. To do this, we use data from 2016, and 2017 Surveys of Korea Small Business Finance conducted by Industrial Bank of Korea. We found that a more intense bank-firm relationship increases the likelihood of loan approval. Also, SMEs borrowing from lower number of banks and with more concentrated loans in main bank seem to obtain credit from main bank at lower interest rate than others. But applying for a loan is not related to the bank-firm relationship. This findings suggest that a close bank-firm relationship can reduce information asymmetry problem and alleviate SMEs’ credit constraint. Also bank-firm relationships seem to be important in determining the loan interest rate. As a relsult, our findings support that relationship lending has a beneficial effect on the supply side of the Korean SME credit market.

A Dual-Channel Sale System in Financially Constrained Supply Chain

In order to realize the sustainable development of the communication industry, many banks have developed some new projects to provide loan to the mobile phone brand companies (MPBCs). This paper studies a perfect information game among three parties: telecom operator (TO), MPBC, and bank. In the first stage, the bank decides an interest rate and shows it to the TO and the competitive MPBC. In the second stage, the TO and MPBC are engaged in Cournot games: a simultaneous subgame, a TO-as-leader sequential subgame, and an MPBC-as-leader sequential subgame. The TO’s and the MPBC’s decisions and the production/sale quantities are investigated. The impacts of the interest rate and the substitute factor on the TO’s and the MPBC’s optimal decisions are analyzed. When the substitute factor is high, at a low interest rate, the total sales in the simultaneous subgame is higher than those in the other two subgames; at a high interest rate, the total sales in the MPBC-as-leader subgame is higher than those in the other two subgames. However, when the substitute factor is low, at a low enough interest rate, the total sales in the simultaneous subgame is higher than those in the other two subgames; at a high enough interest rate, the total sales in the MPBC-as-leader subgame is higher than those in the other two subgames; at a moderate interest rate, the total sales in the TO-as-leader subgame is higher than those in the other two subgames. Besides, the optimal interest rate of the bank is investigated and the impact of the substitute factor on the optimal interest rate is analyzed. The bank sets a higher interest rate in the MPBC-as-leader subgame than those in the other two subgames. Besides, when the substitute factor is low, the bank sets a lower interest rate in the TO-as-leader subgame than that in the simultaneous subgame; however, when the substitute factor is high, the bank sets a higher interest rate in the TO-as-leader subgame than that in the simultaneous subgame.

Is Agricultural Credit Programme Effective in Boro Cultivation? Evidence from State-owned Bank of Mymensingh District

High input-intensive Boro rice cultivation needs substantial agricultural credit for the resource-poor Bangladeshi farmers. An investigation was conducted at Fulbaria upazila of Mymensingh district to assess loan attainment cost from Bangladesh Krishi Bank (BKB) and its utilization pattern; evaluate the effects of credit on Boro cultivation, and identify the major drivers of the agricultural credit programme. For the study, 140 farmers were divided into two groups: those who took a loan from BKB and those who did not. Results revealed that the borrowers had to pay Tk 10.23 for getting a hundred taka loan from BKB most of which was an unofficial cost. More than half of the obtained loan was used for Boro cultivation whereas 21% was used for family consumption and the rest (25%) was used for other purposes such as reimbursement of the previous loan from formal and informal sources, wedding and other income-generating activities including petty business. BKB credit borrowers obtained more benefits through Boro cultivation than non-borrowers. The major strengths of the BKB’s agricultural credit programme were well-established infrastructure, experienced manpower, country-wide network, and lower interest rate. Whereas complex and lengthy institutional procedures, the inevitability of collateral and poor institutional capacity were being revealed as the weaknesses of the programme. Prevalence of brokers or corrupt officials and political influence were identified as the major constraints for the loan acquirement. More advanced research is recommended, with an emphasis on agricultural credit programmes, to ensure their effectiveness. Bangladesh Rice J. 24 (1): 85-95, 2020

An Empirical Bargaining Model with Left-Digit Bias: A Study on Auto Loan Monthly Payments

This paper studies price bargaining when both parties have left-digit bias when processing numbers. The empirical analysis focuses on the auto finance market in the United States, using a large data set of 35 million auto loans. Incorporating left-digit bias in bargaining is motivated by several intriguing observations. The scheduled monthly payments of auto loans bunch at both $9- and $0-ending digits, especially over $100 marks. In addition, $9-ending loans carry a higher interest rate, and $0-ending loans have a lower interest rate. We develop a Nash bargaining model that allows for left-digit bias from both consumers and finance managers of auto dealers. Results suggest that both parties are subject to this basic human bias: the perceived difference between $9- and the next $0-ending payments is larger than $1, especially between $99- and $00-ending payments. The proposed model can explain the phenomena of payments bunching and differential interest rates for loans with different ending digits. We use counterfactuals to show a nuanced impact of left-digit bias, which can both increase and decrease the payments. Overall, bias from both sides leads to a $33 increase in average payment per loan compared with a benchmark case with no bias. This paper was accepted by Matthew Shum, marketing.

Crowds, Lending, Machine, and Bias

Can machines outperform crowds in financial lending decisions? Using data from a crowd-lending platform, we show that, compared with portfolios created by crowds, a reasonably sophisticated machine can construct financial portfolios that provide better returns while controlling for risk. Further, we find that the machine-created portfolios benefit not only the lenders, but also the borrowers. Borrowers receive loans at a much lower interest rate as the machine can weed out the riskiest loans better than the crowds. We also find suggestive evidence of algorithmic bias in machine decisions. We find that, compared with women, men are more likely to receive loans by machine. We propose a general and effective “debiasing” method that can be applied to any prediction-focused machine learning (ML) applications. We show that the debiased ML algorithm, which suffers from lower prediction accuracy, still improves the crowd’s investment decisions in our context. Our results indicate that ML can help crowd-lending platforms better fulfill the promise of providing access to financial resources to otherwise underserved individuals and ensure fairness in the allocation of these resources.

Did the FED React to Asset Price Bubbles?

This paper investigates whether the Federal Reserve Bank (FED) reacted to asset price bubbles before the Great Recession and whether this affected macroeconomic variables. We estimate a DSGE model featuring a financial accelerator and a process for asset price bubbles with different Taylor-rule specifications. We find that a Taylor-rule with a feedback to Tobin’s Q and bubble shocks fits best. Our findings suggest that the FED followed a cleaning rather than a leaning approach prior to the global financial crisis (GFC). Then, we perform a counterfactual analysis and show that this policy created a lower interest rate prior to the GFC compared to a standard Taylor-rule without feedback to financial variables.

'Captivated by Liquidity' – Theoretical Traps and Practical Mazes

There is no uniform theoretical standpoint on the effects of changing interest rates and the role of money among economists. Though these disputes exercise a great influence on the economic policy measures adopted as well. For the management of the 2008 global financial crisis many central banks entered into forceful interest rate cuts to contribute to the revitalisation of the economy. The economic recession caused by the pandemic of 2020 again raises the issue how central banks can stimulate growth. In this study we deal with the liquidity trap issue attributed to Keynes. Keynes pointed out that there might exist a lower interest rate limit under which money demand becomes infinite. His conceptions put the foundations to the question, at what interest rate levels might the liquidity trap – a term coined later by Robertson – phenomenon become effective. He was followed by numerous renowned economists dealing with the conception. In this paper we are discussing the most important theoretical approaches – among others the views of Hansen, Hicks, Tobin, Patinkin, Krugman, Brunner and Meltzer and Eggertson. We provide an overview on the effects of low interest rate levels adopted by Japan, by the central banks of Japan, the USA and the ECB aimed at stimulating the economy. Based on the study it can be confirmed that central banks can contribute to economic growth keeping interest rates low and therewith fostering investment. Nevertheless, beyond keeping short-term interest rates low, it might be adequate to control interest rates of other maturities and, especially under deflationary expectations, central banks should express their prolonged commitment to low interest rates.

PENGARUH ALIRAN MODAL ASING TERHADAP PERTUMBUHAN EKONOMI DI ASIA

ABSTRACTCapital account liberalization possibly promotes growth. However, the policy is considered a source of crisis. This study examines the effect of foreign capital inflows, in terms of FDI (Foreign Direct Investment) and FPI (Foreign Portfolio Investment), on economic growth and examines the determinants of capital flows to selected Asian countries over the 1998-2017 period. Based on the Two-Stage Least Square result, higher USA growth rates and lower interest rate differential are push factors of FDI, while domestic economic growth is a pull factor of FDI and FPI. The long-run FDI positively and significantly affects growth, whereas FPI has a negative but non-significant effect. The result indicates that an increase in growth can boost FDI inflows thereupon leads to higher growth. Keywords: economic growth; capital flows; liberalization