Does face-to-face contact matter? Evidence on loan pricing

Gabbi, Giampaolo; Giammarino, Michele; Matthias, Massimo; Monferrà, Stefano; Sampagnaro, Gabriele

doi:10.1080/1351847x.2019.1703023

Cited by 15 publications

(7 citation statements)

References 50 publications

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“…From the Italian setting, Gabbi et al (2020) document an inverse association between the cost of bank loans and the frequency of face-to-face meetings, especially when these are held at the firm's headquarters. Our research is similar to theirs in that we relate the communication mode to actual banking outcomes rather than firms' perceptions of them, yet different in a number of ways.…”

Section: Background Literaturementioning

confidence: 99%

The value of in-person banking: evidence from U.S. small businesses

Zhang

Han

Kallias

et al. 2021

Rev Quant Finan Acc

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We produce the first systematic study of the determinants and implications of in-person banking. Using survey data from the U.S., we show that firms which are informationally opaque or operate in rural areas are liable to contact their primary bank in-person. This tendency extends to older, less educated, and female business owners. We find that a relationship based on face-to-face communication, on average, lasts 17.88 months longer, spans a wider range of financial services, and is more likely to be exclusive. The associated loans mature 3.37 months later and bear interest rates which are 11 basis points lower. For good quality firms, in-person communication also relates to less discouraged borrowing. These results are robust to multiple approaches for endogeneity, including recursive bivariate probits, treatment effect models, and instrumental variables regressions. Overall, our findings offer empirical grounding to soft information theory and a note of caution to banks against suppressing channels of interpersonal communication.

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Section: Background Literaturementioning

confidence: 99%

The value of in-person banking: evidence from U.S. small businesses

Zhang

Han

Kallias

et al. 2021

Rev Quant Finan Acc

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“…Furthermore, a high default rate increases the cost of capital requirements of the bank. Hence, banks always try to avoid lending to risky or unfamiliar borrowers who may bring cost on a reputation for traditional banks (Gabbi, Giammarino, Matthias, Monferrà & Sampagnaro, 2020;Deli, Hasan & Liu, 2019;Buckley & Nixon, 2009). On other hand, the marginal costs on loans are relatively high for banks than P2P lending platforms which motivate the banks not to offer loans to the perilous borrowers, individuals, entrepreneurs, or small businesses (De Roure, Pelizzon & Tasca, 2016).…”

Section: Literature Reviewmentioning

confidence: 99%

Determination of the Benefits and Risks of Peer-to-Peer (P2p) Lending: A Social Network Teory Approach

Purkayastha

Tuzlukaya

2021

CJFA

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Peer-to-Peer lending which is also known as P2P is an online financial investment platform where individual investors finance projects by lending money to individual borrowers through social networks. P2P models usually contributing to less privileged people especially entrepreneurs and frontier groups who do not have access to formal financial services. However, due to the economic conditions and lack of government support, P2P lending platforms in developing countries often fail to reveal the 'credit history' and 'indebtedness' of individual borrowers which have an expressive impact on loan performance. The objective of this study is to demonstrate theoretically the factors those influence the lenders to participate in the P2P lending platform in Nadia Nahar Purkayastha, Şule Erdem Tuzlukaya 132 developing countries and the associated risks. For this purpose, two propositions are developed to examine the factors to demonstrate the role of the social network is also combined to further explain the P2P lending.

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“…Since the first Basel Committee on Banking Supervision (BCBS) ( 2001) paper, financial literature has discussed the calibration of asset correlation parameters and evaluated differences in large firms' and SMEs' responses to systematic risk (Altman and Saunders, 2001;Petersen, 2004;Gabbi et al, 2020). Numerous studies compare asset correlations and creditworthiness with a borrower's size.…”

Section: Calibrating Minimum Capital Requirements: Empirical Vs Regulatory Asset Correlation Valuesmentioning

confidence: 99%

What is good and bad with the regulation supporting the SME’s credit access

Vozzella

Gabbi

2020

JFRC

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Purpose This analysis asks whether regulatory capital requirements capture differences in systematic risk for large firms and micro-, small- and medium-sized enterprises (MSMEs). The authors explore whether bank capital regulations intended to support SMEs’ access to borrowing are effective. The purpose of this paper is to find out whether the regulatory design (particularly the estimate of asset correlations) positively affects the lending process to small and medium enterprises, compared to large corporates. Design/methodology/approach The authors investigate the appropriateness of bank capital requirements considering default risk of loans to MSMEs and distortions in capital charges between MSMEs and large firms under the Basel III framework. The authors compiled firm-level data to capture the proportions of MSMEs and large firms in Italy during 2000–2014. The data set is drawn from financial reports of 708,041 firms over 15 years. Unlike most empirical studies that correlate assets and defaults, this study assesses a firm’s creditworthiness not by agency ratings or by sampling banks but by a specific model to estimate one-year probabilities of default. Findings The authors found that asset correlations increase with firms’ size and that large firms face considerably greater systematic risk than MSMEs. However, the empirical values are much lower than regulatory values. Moreover, when the authors focused on the MSME segment, systematic risk is rather stable and varies significantly with turnover. This analysis showed that the regulatory supporting factor represents a valuable attempt to treat MSME loans more fairly with respect to banks’ capital requirements. Basel III-internal ratings-based approach results show that when the supporting factor is applied, the Risk-Weighted-Assets (RWA) differences between MSMEs and large firms increase. Research limitations/implications The implications of this research is that banking regulators to make MSMEs support more effective should review asset correlation estimation criteria, refining the fitting with empirical evidence. Practical implications The asset correlation parameter stipulated by the Basel framework is invariant with economic cycles, decreases with borrowers’ probability of default and increases with borrowers’ assets. The authors found that those relations do not hold. This way, asset correlations fall below parameters defined by regulatory formula, and SMEs’ credit risk could be overstated, resulting in a capital crunch. Originality/value The original contribution of this paper is to demonstrate that the gap between empirical and regulatory capital charge remains high. When the authors examined the Basel III-IRBA, results showed that when the supporting factor is applied, the RWA differences between MSMEs and large firms increase. This is particularly strong for loans to small- and medium-sized companies. Correctly calibrating asset correlations associated with the supporting factor eliminates regulatory distortions, reducing the gap in capital charges between loans to large corporate and MSMEs.

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Does face-to-face contact matter? Evidence on loan pricing

Cited by 15 publications

References 50 publications

The value of in-person banking: evidence from U.S. small businesses

The value of in-person banking: evidence from U.S. small businesses

Determination of the Benefits and Risks of Peer-to-Peer (P2p) Lending: A Social Network Teory Approach

What is good and bad with the regulation supporting the SME’s credit access

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