Banks’ limited knowledge about borrowers’ creditworthiness constitutes an important friction in credit markets. Is this friction deeper in recessions, thereby contributing to cyclical swings in credit, or is the friction reduced, as bad times reveal information about firm quality? We test these alternative hypotheses using internal ratings data from a large Swedish cross-border bank and credit scores from a credit bureau. The ability to classify corporate borrowers by credit quality is greater during bad times and worse during good times. Soft and hard information measures both display countercyclical patterns. Our results suggest that information frictions in corporate credit markets are intrinsically countercyclical and not due to cyclical variation in monitoring effort. The presence of countercyclical information frictions provides a rationale for countercyclical provisions or capital in banks to smooth credit cycles.
| Original language | English |
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| Pages (from-to) | 107-142 |
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| Number of pages | 36 |
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| Journal | Journal of Money, Credit and Banking |
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| Volume | 52 |
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| Issue number | S1 |
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| DOIs | |
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| Publication status | Published - Oct 2020 |
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| Externally published | Yes |
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We wish to thank Gustav Alfelt, Jesper Bojeryd, Sharu Kulam, and Paulina Tedesco for excellent research assistance, Luc Laeven (the editor), Evren Ors (our discussant), an anonymous referee, and seminar participants at the Stockholm School of Economics, Pompeu Fabra, ESSEC, the 2015 Financial Safety Net conference, EIEF, NBER, Banque de France, HKUST, IBEFA 2016 Summer Conference, AFA 2016, Swedish Ministry of Finance, BI, Bocconi, the third EuroFIT conference, ASSA‐IBEFA 2017, Norges Bank, the 2018 Swiss Winter Conference on Financial Intermediation, the Universities of Zürich, Groningen and Halle, the 2018 Bocconi/Baffi/Carefin conference on Banking and Regulation, the 2018 EFI workshop in Brussels, the ECB/JMCB 50 year conference, and the Bristol Workshop on Banking and Financial Intermediation for valuable comments. We also wish to thank Tobias Berg, Allen Berger, Lamont Black, Hamid Boustanifar, Geraldo Cerqueiro, Bob DeYoung, John Duca, Leonardo Gambacorta, Mariassuntta Giannetti, Benjamin Guin, Iftekhar Hasan, Andrew Hertzberg, Klaas Mulier, Will Mullins, Leonard Nakamura, Steven Ongena, José‐Luis Peydró, Anthony Saunders, Eric Schaanning, and Rich Townsend for valuable suggestions. Becker and Bos wish to acknowledge research funding from Vinnova. Most of this paper was written while Bos and Roszbach were at Sveriges Riksbank. Any views expressed are only those of the authors and do not necessarily represent the views of Norges Bank or the Executive Board of Sveriges Riksbank.