Bad Times, Good Credit

B. Becker, M. Bos, K. Roszbach

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

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 languageEnglish
Pages (from-to)107-142
Number of pages36
JournalJournal of Money, Credit and Banking
Volume52
Issue numberS1
DOIs
Publication statusPublished - Oct 2020
Externally publishedYes

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