Bad Times, Good Credit

53 Pages Posted: 1 Apr 2015 Last revised: 6 Nov 2016

Bo Becker

Stockholm School of Economics; Centre for Economic Policy Research (CEPR)

Marieke Bos

Swedish House of Finance - Stockholm School of Economics

Kasper Roszbach

Norges Bank - Research Department; University of Groningen - Faculty of Economics and Business; Sveriges Riksbank - Research Division

Date Written: November 5, 2016

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? 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

Suggested Citation

Becker, Bo and Bos, Marieke and Roszbach, Kasper, Bad Times, Good Credit (November 5, 2016). Swedish House of Finance Research Paper No. 15-05. Available at SSRN: https://ssrn.com/abstract=2587713 or http://dx.doi.org/10.2139/ssrn.2587713

Bo Becker (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Dept. of Finance
111 60 Stockholm, 11160
Sweden

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Marieke Bos

Swedish House of Finance - Stockholm School of Economics ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

HOME PAGE: http://www.mariekebos.org

Kasper F. Roszbach

Norges Bank - Research Department ( email )

P.O. Box 1179
Oslo, N-0107
Norway

University of Groningen - Faculty of Economics and Business ( email )

Department of Economics, Econometrics and Finance
Nettelbosje 2
Groningen, NL 9747 AE
Netherlands

HOME PAGE: http://www.rug.nl/staff/k.f.roszbach/

Sveriges Riksbank - Research Division

Stockholm, SE 103 37
Sweden

HOME PAGE: http://www.riksbank.se/research/roszbach

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