Bad Times, Good Credit
53 Pages Posted: 1 Apr 2015 Last revised: 6 Nov 2016
Date Written: November 5, 2016
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? Alternatively, is the depth of this friction reduced in recessions, as tough times reveal information about firm quality? We test these alternative hypotheses using internal ratings data from a large, Swedish bank. This banks’ ability to sort borrowers by credit quality is best in recessions, and worst in good times. Our results suggest that information frictions are counter-cyclical in corporate credit markets.
Keywords: Credit markets, corporate loans, information frictions, business cycles
JEL Classification: G21, G30, E51
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