Recourse, asymmetric information, and credit risk over the business cycle

van der Plaat, Mark and Spierdijk, Laura (2020): Recourse, asymmetric information, and credit risk over the business cycle.

Abstract

Recourse is often included in loan sales and securitization in order to reduce potential problems arising from information asymmetries. Recent literature has shown, however, that recourse was ineffective in preventing such problems. In this paper we empirically study the recourse cyclicality hypothesis, which states that recourse is only effective in signaling asset quality and thereby reducing information asymmetries in a recession. Using data between 2001 and 2016 on U.S. commercial banks, we find that recourse is only effective in signaling asset quality during a recession. When the economy is booming, recourse is ineffective and cannot prevent the build-up of risky assets on- and off-balance sheet of banks. Our results are robust to several specifications.

• Item Type: MPRA Paper
• Language: English
• Keywords: Recourse; Loan Sales; Securitization; Asymmetric Information; Adverse Selection; Moral Hazard; Credit Risk; Banking; Cyclicality
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

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