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FIIE-4: Access to Credit
Collateral and Asymmetric Information in Lending Markets
1Lancaster University, UK; 2Tilburg University, Netherlands, The; 3University of Zürich, Switzerland
We study the benefits and costs of collateral requirements in bank lending markets with asymmetric information. We estimate a structural model of firms’ credit demand for secured and unsecured loans, banks’ contract offering and pricing, and firm default using detailed credit registry data in a setting where asymmetric information problems in credit markets are pervasive. We provide evidence that collateral mitigates adverse selection and moral hazard. With counterfactual experiments, we quantify how an adverse shock to collateral values propagates to credit supply, credit allocation, interest rates, default, and bank profits and how the severity of adverse selection influences this propagation.
The Digital Credit Divide: The Effect of Marketplace Lending on Entrepreneurship
1Florida Atlantic University; 2University of Birmingham
Online marketplaces have become an important source of credit for businesses over the past decade. This paper shows that marketplace loans cause a significant increase in the level of entrepreneurship in the United States. Using a fuzzy regression discontinuity design that exploits exogenous variation in borrowers’ access to marketplace loans along US state borders, we estimate a 10% increase in marketplace lending causes a 0.6% increase in establishments per capita. This is mainly driven by marketplace lending increasing the number of small firms. Consistent with marketplaces alleviating credit constraints, the effects are more pronounced within industries that are more dependent upon external finance, in regions with inferior access to financial institutions, in low-income areas, and among industries with lower sunk costs of entry. The results highlight that marketplace lending impacts the real economy, illustrating the important ramifications of the rapid growth of the Fintech sector.
Financial Access Under the Microscope
1National University of Singapore; 2National Bank of Rwanda; 3Federal Reserve Board; 4International Monetary Fund
We examine the impact of a large-scale microcredit expansion program on financial access and the transition of previously-unbanked borrowers to commercial banks. Using administrative data on the universe of loans from a credit register accessible to all lenders, we show that the program improved access to credit, especially in underdeveloped areas, with positive effects on business and mortgage lending. The program also generated positive spillovers to the commercial banking sector. As the newly-created microfinance institutions (MFIs) faced lending constraints, a sizable share of first-time borrowers obtained subsequent loans—that were larger, cheaper, and longer-term—from commercial banks, which expanded their branch network in under-served low-risk areas. The individuals switching from MFIs to banks were less risky than non-switchers and not riskier than existing bank borrowers. Overall, our results suggest that the microfinance sector, coupled with a credit reference bureau, can mitigate information frictions in credit markets and serves as a pathway for first-time borrowers to commercial banks.
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