Credit Clean Up

Credit Repair Magic

Bruce Harley is the creator of this credit repair magic with an experience in the credit repair industry for more than two decades. He is also recognized in the Nationwide industry expert on the topic of credit repair. There have been thousands of employees who have gained from this system. The credit repair magic was established more than a decade and a half ago. It's effectiveness and usefulness has been applauded by various business companies. With this type of credit repair, the system cannot be handled by any machine, only a human can handle the dispute of the credit, this will allow any other dispute in the coming months as compared to the machine that will only accept another dispute after a total of six months from the previous one. The people handling the dispute are far more likely to initiate an investigation and if you understand what to inform them and how to approach it, the dispute you have can never be deemed irrelevant again. The step by step system will assist you to fix your credit faster than any other credit repair system at any price. This system is guaranteed to work for you. The credit repair magic is found online that is accessible at the click of a button and can be read on any of the electronic gadgets you have. What's more, you will get the updates once the system has been updated automatically. Read more here...

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Twostep Estimation Of A Credit Scoring Model

Greene (1995c) estimates a model of consumer behavior in which the dependent variable of interest is the number of major derogatory reports recorded in the credit history of a sample of applicants for a type of credit card. In fact, this particular variable is one of the most significant determinants of whether an application for a loan or a credit card will be accepted. This dependent variable y is a discrete variable that at any time, for most consumers, will equal zero, but for a significant fraction who have missed several revolving credit payments, it will take a positive value. The typical values are zero, one, or two, but values up to, say, 10 are not unusual. This count variable is modeled using a Poisson regression model. This model appears in Sections B.4.8,22.2.1,22.3.7, and 21.9. The probability density function for this discrete random variable is where w, might include age, income, whether the applicants own their own homes, and whether they are self-employed these are...

Credit Unions Credit unions are small cooperative lending institutions organized around a particu

Lar group of individuals with a common bond (union members or employees of a particular firm). They are the only financial institutions that are tax-exempt and can be chartered either by the states or by the federal government over half are federally chartered. The National Credit Union Administration (NCUA) issues federal charters and regulates federally chartered credit unions by setting minimum capital requirements, requiring periodic reports, and examining the credit unions. Federal deposit insurance (up to the 100,000-per-account limit) is provided to both federally-chartered and state-chartered credit unions by a subsidiary of the NCUA, the National Credit Union Share Insurance Fund (NCUSIF). Since the majority of credit union lending is for consumer loans with fairly short terms to maturity, they did not suffer the financial difficulties of the S&Ls and mutual savings banks. Because their members share a common bond, credit unions are typically quite small most hold less than...

Credit Ratings and Default Rates

To make it easier for lenders to judge the probability of default, a number of data vendors for credit-ratings have appeared. For individuals, Experian and Dun&Bradstreet provide credit-ratings you should request one for yourself if you have never seen one. For corporations, the two biggest credit rating agencies are Moody's and Standard&Poor's. (There are also others, like Duff and Phelps and Fitch.) For a fee, these agencies rate the issuer's probability that the bonds will default. This fee depends on a number of factors, such as the identity of the issuer, the desired detail in the agencies' investigations and descriptions, and the features of the bond (e.g., a bond that will pay off within one year is usually less likely to default before maturity than a bond that will pay off in thirty years thus, the former is easier to grade). The credit rating agencies ultimately do not provide a whole set of default probabilities (e.g., 1 chance of 100 loss, 1.2 chance of 99 loss, etc.), but...

Credit Checking Potential Customers

When a business extends credit, it is in effect loaning customers money, and any company wants to be reasonably sure that the money will be paid back. The best assurance of being able to collect is to check each customer's credit history before extending credit. That can be as simple as a phone call to a bank. However a business chooses to check a customer, it will want to build a credit relationship slowly and carefully. Remember, not every customer deserves the same credit terms thus, it's best to approach credit on a case-by-case basis. One thing to note is how long the company has been in business. Companies that have been around for at least five years are more likely to pay their bills on time or they wouldn't be around anymore. The key ways to check a customer's credit include credit reports, credit references, financial statements, personal credit reports on the owner or CEO, and letters of credit. Credit Reports. It's always a good idea to obtain a potential customer's credit...

Why Do Credit Ratings Fail to Anticipate Crises

As discussed in chapter 1, credit ratings and interest rate spreads may fail to anticipate a crisis either because lenders do not have access to timely and comprehensive information on the creditworthiness of the borrower or because lenders expect an official bailout of a troubled sovereign borrower. We now take up two related issues that could be associated with the poor performance of credit ratings as predictors of financial crises. The first one relates to the distinction between default and financial crises. The credit rating agencies themselves often argue that sovereign credit ratings are meant to provide an assessment of the likelihood of sovereign default. Hence to the extent that a domestic banking crisis or a currency crisis is decoupled from the probability of sovereign default, credit ratings should not a priori be expected to predict currency or banking crises. For example, the three Nordic countries included in our sample had both currency and banking crises in the...

Do Sovereign Credit Ratings Predict Crises

We attempt to evaluate the predictive ability of sovereign credit ratings using two approaches. First, we tabulate the descriptive statistics for the ratings along the lines of the signals approach and compare how these stack up to the other leading indicators we have analyzed. Second, we follow the approach taken in much of the literature on currency and, more recently, banking crises and estimate a probit model. Specifically, we estimate a series of regressions where the dependent variable is a crisis dummy that takes on the value of one if there is a crisis and zero otherwise and where the explanatory variable is the credit ratings. Our exercise is very much in the spirit of Larrain, Reisen, and von Maltzan (1997), who, using Granger causality tests, assess whether credit ratings lead or follow market sentiment as reflected in interest rate differentials. These interest rate differentials reflect the ease or difficulty with which sovereign countries can tap international financial...

Are We Headed for a Cashless Society

The narrowest measure of money that the Fed reports is M1, which includes currency, checking account deposits, and travelers checks. These assets are clearly money, because they can be used directly as a medium of exchange. Until the mid-1970s, only commercial banks were permitted to establish checking accounts, and they were not allowed to pay interest on them. With the financial innovation that has occurred (discussed more extensively in Chapter 9), regulations have changed so that other types of banks, such as savings and loan associations, mutual savings banks, and credit unions, can also offer checking accounts. In addition, banking institutions can offer other checkable deposits, such as NOW (negotiated order of withdrawal) accounts and ATS (automatic transfer from savings) accounts, that do pay interest on their balances. Table 1 lists the assets included in the measures of the monetary aggregates both demand deposits (checking accounts that pay no interest) and these other...

The public sector and nonprofit organizations

The class of non-profit (NP) organizations includes a wide variety of types voluntary organizations, co-operatives, credit unions, labour unions, churches, charities, hospitals, foundations, professional associations and some educational institutions. Their objectives may vary accordingly, but one general pattern can be observed. The greater the proportion of their funding from external contributors, the more will the first objective above be emphasized, the maximization of the utility of the contributors this means that the behaviour of the organization will resemble more closely that of the profit-maximizing firm. This would be the case for many co-operatives, credit unions and labour unions. As the organization relies less on external contributions so the second objective may become more important. This can also have serious implications for the public sector it is often assumed that this has the third objective above, but the second objective may be more important if external...

Creditlinked Structure SBC Glacier Finance

Ture of these notes transfers the credit risk of the corporate loans to the investors from SBC Warburg - the originating bank. As a credit-linked structure, the notes are capped by the credit rating of the bank, which was rated AAA. The investors in this transaction assume the risk of both the originating bank and the underlying obligations. Despite a lack of detailed disclosure of underlying corporate obligations, or of obligor characteristics, the portfolio is dictated by strong collateral guidelines. Furthermore, the credit composition of the underlying pool of assets must be broadly maintained, with a ceiling on single industry concentration of 8 per cent and a 5 per cent exposure limit to sovereigns of rating below AA- or Aa3. Although differing environments and jurisdictions can impact on the level of credit exposure to SBC, the consequences from the default probability remain. In the event of default by SBC Warburg, there is a strong likelihood that the CLO-Glacier structure's...

Current Overview and Problems

Generally, Tier 1 and Tier 2 capital is intended to buffer against such credit losses, where the credit risk associated with an asset depends on the creditworthiness of the counterparty. Here lies the difficulty for banks in terms of their corporate clients, for currently, claims on a varied spectrum of corporates are all risk weighted at 100 per cent, irrespective of their credit quality. For some credit-risk profiles this may seem prudent but for diversified portfolios of investment-grade credits, this may seem excessive. According to rating agencies - Standard and Poor's (S&P) and Moody's -the default rate on investment-grade credits is low. In a Merrill Lynch (Quinlan et al., 1998) report the average historical cumulative default rate for all investment-grade debt calculated by S&P over a five-year period is 0.81 per cent and 0.84 per cent for Moody's. This represents only default rates, but for loss rates the probability would be lower.

Table 24 Summary of Recent Empirical Studies Examining Whether the Imposition of Hard Budget Constraints HBC and

Find privatization alone added nearly 10 percentage points to the revenue growth of a firm sold to outside owners. Most important, finds that the threat of hard budget constraints for poorly performing SOEs falters, since governments are unwilling to allow these firms to fail. The brunt of SOEs' lower creditworthiness falls on state creditors. Privatization required to improve performance threat of HBC not credible. budget constraints for poorly performing SOEs falters, since governments are unwilling to allow these firms to fail. The brunt of SOEs' lower creditworthiness falls on state creditors.

Depository Institutions Deregulation and Monetary Control Act 1980 G2 K2

SAVINGS BANKS, SAVINGS AND LOAN ASSOCIATIONS and credit unions. The federal reserve system was empowered to demand supplementary reserves of 4 per cent of deposits for a maximum of ninety days and allowed to charge for its services. now accounts were legalized and many interest rate ceilings phased out.

Summary and Conclusions

Credit unions) are also playing an increasingly active role in the microfinance market today. Most credit unions in low-income countries are fragile. They typically have thin capital bases, often lack access to funds to meet liquidity shortfalls, have difficulties diversifying their risks, are easily crippled by inflation, and are quickly damaged when their members have economic reverses. Credit unions also face dilemmas as they grow they lose their informational advantages, they are forced to rely on paid rather than voluntary managers, and they must increasingly count on formal sanctions to enforce contracts . Principal-agent problems, transaction costs, and prudential regulation also become increasingly important as credit unions grow. What does modern microfinance add As we will see in greater detail in the next chapter, microfinance not only is a device for pooling risk and cross-subsidizing borrowers in order to improve efficiency, it also increases their access to outside...

Box 62 Another view of the optimum tariff offer curve analysis

As we noted in Chapter 5, a direct subsidy can provide the same protective effect as a tariff, but without distorting prices and causing a loss of consumers' surplus. Also, subsidies can be used to address other distortions, such as an inadequate capital market or banking system to finance the plant, equipment, or training necessary to enter an industry. Borrowers with inadequate collateral to offer may appear to be poor credit risks who are passed over by private lenders in spite of promising ideas. While economists generally advocate policies to deal directly with capital market distortions, a trade barrier that provides some assurance of high future profitability nevertheless may be the only tool available to promote such an industry. In spite of the fact that it is an inefficient tool, a tariff may appear desirable in countries that have great difficulty collecting tax revenue. Eliminating distortions directly often requires scarce tax revenues, a drawback that does not exist in...

The classical theory of interest

The classical theory of interest simply states that the rate of interest is determined by the supply and demand for capital, which transaction may be effected through the medium of money (specie or currency), checks, or other money substitutes. Thus, it is capital that is offered and taken in a loan on the basis of the borrower's credit worthiness or the probability of the borrower being able to pay back on the specified terms of the loan. The loan transaction also may be described as an extension of credit by a lender of capital, hence interest also being described as the cost of credit the facility of acquiring the use of real goods and services without first having earned the income to purchase them. The classical theory of interest thus turns very much on the meaning of capital.

Realistic Theories of Financial Markets

Systems of deposit insurance and bank guarantees now ensure that depositors' trust in banks is backed up by their trust in the ability of governments to protect them in the event of default. But other kinds of trust in the financial system are not so easily maintained. Banks are sustainable if and only if they can accurately assess the willingness and ability of borrowers to repay their debts. In normal conditions, this is not an exceptionally difficult task. Banks can look at standard measures of ability to repay, credit histories, and so on to distinguish good risks from bad, and borrowers have strong incentives to maintain good credit histories.

Documentary Collections

The buyer can take possession of the goods before paying for them. It is also possible to defer payment acceptance, subject to the exporter's approval, until arrival of the goods. It may also be argued that collections are cheaper and simpler for the importer than documentary credits. This is because the collecting bank does not have any financial interest or risk commitment, so there are fewer formalities and costs. Finally, an importer does not require a credit limit from his her bank if he she imports on collecting terms, unlike other methods of international trade settlement where a suitable credit facility is required.

Reconsideration Of Social Interaction And Exchange In The Absence Of The State

And services and offering continued maintenance services in order to strengthen their reputation. We see the value placed on reputation when an acquiring firm makes a goodwill payment - the price of the firm's reputation - to the seller. As George Stigler points out, 'Reputation is a word which denotes the persistence of quality, and reputation commands a price (or exacts a penalty) because it economizes on search' (1961, 224). One might question what is to be done in situations where the reputation of one of the traders is unknown. Such situations, however, provide a market opportunity for an entrepreneur to supply information regarding the reputation of the seller and his product (Klein 1997). These information sources also aid in overcoming the problems of fraud, stealth, and deception to which Tullock refers. Examples of such services include Consumer Reports magazine, which provides information, testing, and rankings for numerous consumer products '1-800-Dentist,' which provides...

Creating Dynamic Incentives

In this section we present a simple model of debt without collateral to analyze how bilateral contracts work. We then explore the role of progressive lending as an additional tool. While a thick, competitive microfinance market ought to be a microfinance dream, we describe cases in which competition has undermined dynamic incentives in microfinance (and led to microfinance crises in Bolivia and Bangladesh). And we describe why credit bureaus are needed to improve matters.

Preventing Overdue Accounts

The best way to prevent overdue accounts is to avoid doing business with customers who have bad credit histories. However, if you limited yourself to doing business with companies with spotless credit records, a pool of potential customers would be quite small. And unfortunately, with a growing business you often have no choice but to do business with anyone who wants to do business with you. Even then, you don't always have complete control of the terms of sales agreements. The reality is that the biggest and best clients want to be billed quarterly and then have 60 days to pay you. And you certainly don't want to cut off those clients. 1. Watch for new customers with bad credit history. You can't expect that a company or a person with a history of bouncing checks or paying their bills late will change their ways when dealing with you. If you must do business with the chronically late, lay down credit rules early and firmly and start the relationship off slowly. Keep the amount of...

How Finance Affects Business Formation

Not only do small businesses borrow from banks, but they also tend to concentrate their borrowing at a single bank with which they have a long-term relationship. The nature of these relationships is an important feature of small-business lending long-term relationships enable banks to collect private information on the credit worthiness of small firms. Recent evidence suggests that the credit availability is enhanced when banks forge relationships with small businesses. Petersen and Rajan (1994) find that small firms that have established a relationship with a bank are less likely to use expensive trade credit. They find very weak effects on loan interest rates, however, suggesting that there may be some credit rationing for firms that have not established a banking At the same time that it enhanced competition, deregulation and consolidation in banking have led to a decline in the importance of small banks (table 2). A number of recent studies have argued that small banks possess a...

The State of the Economy

With an international single-B+ credit rating, Ghana currently is considered one of Africa's economic success stories. Like other African countries, Ghana relies on exports of primary commodities - gold, cocoa and timber - as key sources of foreign exchange. In recent years, Ghana has been credited with implementing successful fiscal and monetary stability programmes, and has embarked on a credible privatisation programme.

Issues In The News

You might be wondering, Is there any way I can get a bit more interest Well, yes. You could invest some of your portfolio in a junk-bond fund. Bonds are long-term, inter est-bearing IOUs . . . and . . . bonds issued by corporations tend to pay higher interest. That's because they can go bankrupt and default on their bonds. Bonds issued by companies with poor credit ratings pay the highest interest of all. The only problem When you buy junk bonds at high prices, you run the risk of nastiness if the economy gets smacked. Because the credit-worthiness, or financial health, of corporations and governments differ, all 6 percent, 20-year, 1,000 bonds will not cost the same. There are no guarantees that the issuer will be around in 20 years to redeem the bond. Therefore, investors will pay more for bonds issued by an agency with an impeccable credit rating. However, investors will pay less for a similar bond if it is issued by a corporation with a low credit rating. Fortunately, investors...

Intermediary Organizations

In 1945, the U.S. airlines, through their trade organization the Air Transport Association, established the Air Traffic Conference (ATC) which, among other things, was to serve as a regime through which the airlines dealt with the travel agencies. Since the agent actually writes an airline's tickets, and since the agent receives the money from the passenger, the airline naturally has great concern with each agency's competence, honesty, and creditworthiness. The ATC undertook the job of screening and accrediting agents, while the airlines for their part agreed not to allow their tickets to be sold by any agents other than those so accredited. A clearing-house was established within the ATC called the Area Settlement Plan, whose task it was to distribute among the airlines the ticketing revenues collected by the agents. Commission rates were set on a uniform scale. The CAB had to approve all details of the arrangements between the ATC and the airlines, including the commission rates,...

Stability and Growth Pact

The argument for some form of SGP governing the macroeconomic policies of national governments comes from a realization that there are spillover effects from one country's fiscal policy into other countries. It is often said to have its origins in the suspicions of some countries (for example, Germany) that other countries would be 'profligate' (for example, Italy) to their individual and collective detriment. It is, of course, one of the ironies that it was Germany that was one of the first to break the 3 per cent deficit rule - in part because of their financial requirements for reunification. This line of argument appears to have been based on the idea that if one country ran 'excessive' deficits it would place upward pressure on the interest rate on that government's bonds. But those bonds would be denominated in euros and the upward pressure on interest rates would spread to other countries. This line of argument is faulty in two respects. First, if one country borrows...

Product differentiation strategies in mobile telecommunications

The main concept was that the subscriber paid in advance to receive a credit for a certain amount of traffic to be consumed within a certain time frame there was no monthly fee to be paid. Moreover, upon expiry of the credit the card could still be used to receive incoming calls for a certain time period. Though there were no rental charge to be paid, pre-paid subscribers tended to have a cost per minute of calling time. However, one of the main attractive features for the user of the pre-paid card was the full control over cost.9 For the card issuer, the advantage was the absence of credit risk because the telecommunications services had been paid for in advance. This permitted the attraction of a customer basis which would otherwise have been excluded because of poor creditworthiness.10 This was particularly important in countries with less developed capital markets, where almost all transactions were on a cash basis.11 The lessened credit risk, while...

Bilateral Markets Dealers Exchanges and Auctions

In. bilateral markets buyers and sellers trade directly, although this is typically facilitated by a broker. Such markets are extremely flexible as the trading parties can specify any contract terms they desire, but this flexibility comes at a price. Negotiating and writing contracts is expensive. Assessing the credit worthiness of one's counter party is also expensive and risky. For these reasons there is a great advantage to moving toward more standardized and centralized trading when this An exchange provides security for traders by acting as the counter party to all trades, eliminating traders' concerns over creditworthiness. Exchanges utilize auctions and are sometimes called auction markets the NYSE is an example. As Bodie et al. (1996,24) point out, An advantage of auction markets over dealer markets is that one need not search to find the best price for a good. Because an

Monitoring and Enforcement of Restrictive Covenants Once a loan has been made the

Savings accounts tell the banker how liquid the potential borrower is and at what time of year the borrower has a strong need for cash. A review of the checks the borrower has written reveals the borrower's suppliers. If the borrower has borrowed previously from the bank, the bank has a record of the loan payments. Thus long-term customer relationships reduce the costs of information collection and make it easier to screen out bad credit risks. Long-term relationships benefit the customers as well as the bank. A firm with a previous relationship will find it easier to obtain a loan at a low interest rate because the bank has an easier time determining if the prospective borrower is a good credit risk and incurs fewer costs in monitoring the borrower. At first you might be puzzled by the first type of credit rationing. After all, even if the potential borrower is a credit risk, why doesn't the lender just extend the loan but at a higher interest rate The answer is that adverse...

Mondragon Cooperative Corporation MCC in Spain

Another successful cooperative business is the Mondragon Cooperative Corporation (MCC) based in the Basque Country and extending over all of Spain. MCC is the world's largest worker cooperative, made up of manufacturing and retail companies. This large integrated business cooperative is now the largest corporation in the Basque Country and 7th largest industrial group in Spain, with over 11.9 billion euros (us 14.8 billion) in annual sales in 2005 and a workforce of roughly 78,455. MCC's ventures include six financial enterprises (credit unions and community banks), 67 industrial enterprises manufacturing everything from refrigerators to bicycles, eight retail and distribution businesses, cultural centers and three universities. Estimates for 2002 suggest that MCC contributed 3.7 towards the total GDP of the Basque Country.25

Digitally connected networks

Involving governments, which seems like a good idea, particularly in countries where the checks and balances of a developed democracy are not available (and these are not only countries of the so-called Third World ). In network terms, the problem described by de Soto is how to turn low-trust networks into high-trust ones. In the latter, reliable relationships are more easily formed. For this to be possible, it is necessary to have a structure where local networks (such as villages) are connected by hubs that are part of a larger network (which is also the structure of the Internet). The economic success of the first world can be explained by the existence of many of these trust hubs, which range from banks and credit rating institutions to courts of justice. They are the nodes that connect local and otherwise unconnected networks in which trust relations (strong ties) may already exist. However, the lack of more numerous and longer distance connections (with weaker ties) prevents...

The Group Lending Methodology

Weeks later by loans to two other members, and then, after another four to six weeks, by a loan to the group chairperson. (This pattern is known as 2 2 1 staggering.) At first, the groups were seen just as sources of solidarity, offering mutual assistance in times of need. For example, if a member of a group fails to attend a meeting, the group leader repays on her behalf, and thus the credit record of the absentee borrower remains clean, and so does the group's. The original premise was that perhaps someone might experience a delay in getting a loan if there were a problem within their group, but there would not be further sanctions.11 In a typical situation, when all goes well with repayments, borrowers are offered a larger loan repayable in the next loan cycle (loan cycles from initial disbursement to repayment of the final installment were typically a year in the classic Grameen system). Thus, if the relationship between Grameen and the borrowers continues, loan sizes grow over...

The Gains From Assetbacked Securitization

Where CP are cash proceeds from ABS, CH are credit enhancement costs, CR are credit rating agency fees, rD is the cost of attracting deposits and rB is the cost of raising finance through bond issues. As we have noted, this is often likely to be the case due to slippages in the banks' own credit rating. It may also help low-rated banks, who have to pay a relatively high rate to raise funds (a high rD or rB), to achieve new funds by issuing an ABS at a significantly lower cost. This arises because the rating attached to the securities may be higher than that applicable to the originating bank.

Your Capacity To Repay Debt

1 p Check Your Credit You can get one free report per year from each credit bureau. Call 877-322-8228 write to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281 or go to 2. Do you have a good credit rating Lenders want to know if you've repaid previous debts on time. Your Credit Score Like your shadow, your credit score, or credit rating, follows you throughout your life. It's a number from 300 to 900 that shows how responsible you've been with your finances recently and in the past. The higher your score is, the more likely you are to get credit and a low interest rate. Credit scores are assigned by three credit bureaus Equifax, Experion, and TransUnion that track each person's financial history and create credit reports. Check yours at least once a year to be sure it contains no incorrect information.

Other Sources of Credit

There are a number of ways to borrow money besides credit cards. These include relatives and friends, as well as retail stores and financial institutions, such as banks, credit unions, and savings and loan associations. Retail Stores Most department stores and other retailers let customers with good credit buy merchandise from their stores with one of three types of credit Service providers Your agreements with providers of services (electricity, cell phone, Internet, etc.) are credit arrangements. The history of your payments to them often appears on credit reports especially if you pay late. Financial Institutions Commercial banks, savings banks, credit unions, finance companies, and some insurance companies lend money, with varying interest rates and fees. Shop and compare costs before borrowing. Some loans require a single, lump-sum payment on a specific date others accept monthly payments for either a set or indefinite period of time.

Does monetary union need budget rules

Most countries are close to this line, but a few are not. The interesting point is that exactly those countries that are situated quite high above the Fisher line are those that have a poor credit rating according to the Standard & Poor's classification. While the countries positioned close to or below the line typically have an A classification, indicating a 'strong' credit rating, those classified significantly above the line typically have a B rating ('adequate') or even a C rating ('vulnerable') as in the case of Argentina and Turkey. The fit is not perfect, though, since Russia is on the line with a B classification and India is somewhat above the line with an A-3 classification. This is not surprising, however, since the S&P's rating cannot possibly be an all-encompassing measure of risk, and the data shown are short-run data, not long-run averages, and thus are also affected by the business cycle. However, the data illustrate the role of the risk-premium quite clearly. Figure...

Interest rates inflation and the risk premium

Sovereign credit rating Sovereign credit ratings from the Standard & Poor's homepage at Sovereign credit ratings from the Standard & Poor's homepage at Economist for a sample of emerging-market economies and the accompanying default risk classification according to the Standard & Poor's credit rating.

The Effects of Unbalanced Budgets

In one sense, local government borrowing is analogous to family or private borrowing in that it can provide only for temporary and extraordinary deficits. Without recourse to money creation, local governments must look to their own credit worthiness. There remains a fundamental difference between local government borrowing and family borrowing that should not be overlooked. In the latter, there is normally a single, responsible decisionmaking unit. In a democratically organized political group, by contrast, the

Chart S3 Starting a business

5.33 Moreover, in many developing countries, in the absence of well developed systems, banks do not have access to enough information on the value of the property and the credit history of the potential borrower to allocate credit objectively, and have to rely instead on social networks to assess creditworthiness. Two types of institution are key to expanding access to credit and improving its allocation credit information registries or bureaus, and enforceable legal rights for creditors. Chart 5.5 below shows the coverage of private bureaus and public registries - two different methods of information sharing - per thousand people, as an indication of banks' access to information about individuals' creditworthiness outside informal social networks or knowledge about existing past clients.

National State or Provincial Wealth banks

What if accountability for monetary policies of our nations were oriented towards building and sustaining genuine wealth Imagine US or Canadian Genuine Wealth Dollars facilitating more genuine trade of the nations' comparative advantages rather than supporting the current system of trade which encourages over production and over consumption. Imagine the province of Alberta or the State of Texas using Alberta and Texas Genuine Wealth accounts to guide regional monetary policy and possibly issuing provincial or state currency. Imagine the City of Seattle or the City of Edmonton having a set of municipal Genuine Wealth accounts to guide local banking and credit decision making. Imagine the creation of local complimentary currencies Seattle Bucks or Edmonton Dollars. Money would no longer be created out of thin air but created in proportion to the real life conditions in a community and to improve or sustain the real wealth and quality of life of each community in accordance with its own...

Quality Uncertainty and the Market for Lemons

In fact, credit card companies and banks can, to some extent, use computerized credit histories, which they often share with one an other, to distinguish low-quality from high-quality borrowers. Many people think that com- puterized credit histories are an invasion of privacy. Should companies be allowed to keep these credit histories and share them with other companies We can't answer this question for you, but we can point out that credit histories perform an important function. They eliminate, or at least greatly reduce, the problem of asymmetric information and adverse selection, which might otherwise prevent credit markets from operating. Without these histories, even the creditworthy would find it extremely costly to borrow money.

Jubilee 2000Campaign to Drop the Debt

Conservatives thought it inevitable because they had no illusion about the creditworthiness of the poorest countries. Liberals thought it was the right thing to do. Many in the public were eager to find a sensible way to support the world's poor. And perhaps most important at the end of the day, many conservatives who might otherwise oppose foreign aid joined out of religious motivation.

Measuring Debt Burdens And The Capacity For Repayment

Measuring debt burdens for state and local governments addresses the question of an appropriate amount of debt. Measuring and comparing long-term debt burdens has been a centerpiece of municipal credit analysis for decades. Debt burden measures have traditionally been used to assess the debt carrying capacity of a government and the risk associated with further borrowing (Berne and Schramm, 1986). The basic concept of a debt burden is generally accepted and can be given as a simple ratio (Bahl and Duncombe, 1993)

The Trait Group Model Individual Or Group Selection

Economists use models similar to the ones discussed to explain how cooperation among self-interested individuals is possible. It seems likely that Sober and Wilson would describe the lender-borrower relationship as an example of group selection, where lenders assort by checking the credit rating of borrowers and demanding collateral. Economists produce models of individuals interacting in groups with much of this interaction involving non-simultaneous exchange, and they do so without giving up the assumption of strong methodological individualism or arguing that group selection is taking place.

Do Monetary Variables Predict Investment

An increase in the demand for consumer goods mobilizes a corresponding increase in the demand for capital goods. Alternatively, the data might support the risk-based scenario based on exogenous shocks to retained earnings and a subsequent expansion in risky investment. In that case the importance of sales and profits in investment equations supports models of credit rationing. In credit rationing models investment is constrained by cash flow and creditworthiness, rather than by a dearth of available opportunities. With credit rationing, we would expect changes in sales and profits, which proxy for liquidity, to outperform cost of capital measures in investment regressions.

Answers To Selected Questions And Problems

Because the costs of making the loan to your neighbor are high (legal fees, fees for a credit check, and so on), you will probably not be able to earn 5 on the loan after your expenses even though it has a 10 interest rate. You are better off depositing your savings with a financial intermediary and earning 5 interest. In addition, you are likely to bear less risk by depositing your savings at the bank rather than lending them to your neighbor.

Sovereign bankruptcy for heavily indebted crisis countries

If the World Bank has to write off a large number of loans, its credit rating, which has been excellent, will decline and it will only be able to borrow at higher interest rates, which will have to be passed on to the borrowing countries. If private lenders, to the limited extent that they have made loans to very poor countries, are compelled to write off loans that in fact could eventually be repaid, they will never lend in these or similar countries again. For countries that simply cannot repay debts, forgiveness will have to occur, but to extend this idea to a far larger number of countries that can repay their debts in time, would be very dangerous. It would mean that these and similar countries would be unable to borrow in the future, which is hardly a prescription for success in their future development.

Io Banking Industry Structure and Competition

The operations of individual banks (how they acquire, use, and manage funds to make a profit) are roughly similar throughout the world. In all countries, banks are financial intermediaries in the business of earning profits. When you consider the structure and operation of the banking industry as a whole, however, the United States is in a class by itself. In most countries, four or five large banks typically dominate the banking industry, but in the United States there are on the order of 8,000 commercial banks, 1,500 savings and loan associations, 400 mutual savings banks, and 10,000 credit unions. We start by examining the historical development of the banking system and how financial innovation has increased the competitive environment for the banking industry and is causing fundamental changes in it. We then go on to look at the commercial banking industry in detail and then discuss the thrift industry, which includes savings and loan associations, mutual savings banks, and...

Financial Crises and Aggregate Economic Activity

As we saw earlier, individuals and firms with the riskiest investment projects are exactly those who are willing to pay the highest interest rates. If market interest rates are driven up sufficiently because of increased demand for credit or because of a decline in the money supply, good credit risks are less likely to want to borrow while bad credit risks are still willing to borrow. Because of the resulting increase in adverse selection, lenders will no longer want to make loans. The substantial decline in lending will lead to a substantial decline in investment and aggregate economic activity. Increases in Uncertainty. A dramatic increase in uncertainty in financial markets, due perhaps to the failure of a prominent financial or nonfinancial institution, a recession, or a stock market crash, makes it harder for lenders to screen good from bad credit risks. The resulting inability of lenders to solve the adverse selection problem makes them less willing...

Financial Intermediaries

The study of money and banking focuses special attention on this group of financial institutions, because they are involved in the creation of deposits, an important component of the money supply. These institutions include commercial banks and the so-called thrift institutions (thrifts) savings and loan associations, mutual savings banks, and credit unions.

How To Establish Credit

Paying cash for everything does not make you a good credit risk. To prove you're responsible enough to get credit, you have to establish a credit history. About 15 of a credit score is based on how long you've had credit. So it's important to establish credit as soon as possible. 3. Have someone with good credit co-sign a credit application. A cosigner agrees to pay your debt if you don't.

Why Study Banking and Financial institutions

Banks are financial institutions that accept deposits and make loans. Included under the term banks are firms such as commercial banks, savings and loan associations, mutual savings banks, and credit unions. Banks are the financial intermediaries that the average person interacts with most frequently. A person who needs a loan to buy a house or a car usually obtains it from a local bank. Most Americans keep a large proportion of their financial wealth in banks in the form of checking accounts, savings accounts, or other types of bank deposits. Because banks are the largest financial intermediaries in our economy, they deserve the most careful study. However, banks are not the only important financial institutions. Indeed, in recent years, other financial institutions such as insurance companies, finance companies, pension funds, mutual funds, and investment banks have been growing at the expense of banks, and so we need to study them as well.

Asymmetry Of Information

Examining the firm's creditworthiness. A bank will require a firm to produce a business plan before granting a loan. Given the number of such plans examined, a bank will have developed special expertise in assessing such plans and will therefore be more competent in judging the validity of the plan and separate the viable from the nonviable projects. A similar process will be required for domestic loans and the bank will scrutinize the purpose of domestic loans. Further controls exist in the form of 'credit-scoring' whereby a client's creditworthiness is assessed by certain rules. A very simple example of this is in respect of house purchase where the maximum amount of a loan is set with reference to the applicant's income. It should be admitted that other more public information is available in respect of firms. Specific rating agencies exist who provide credit ratings for firms and also sovereign debt. The most well-known examples are Standard & Poor and Moody. This information...

The Major Buyers of Junk Bonds

Rationalizations aside, a single explanation for thrifts' investment in junk bonds stands out owners and managers of thrifts had strong financial incentives to make these risky investments. Thrifts were able to attract deposits at relatively low cost. Since they were insured by the Federal Savings and Loan Insurance Corporation (FSLIC) up to 100,000 per account, most depositors did not need to look to the underlying creditworthiness of the institution or to its assets. They simply needed to consider

Bank Failure The Controversies

Each bank is required to produce a quarterly 'Key Information Summary', with a summary of the bank's credit rating, capital ratios (using the Basle definitions), and information on exposure, concentration, asset quality, profitability, and, if applicable, shareholder guarantees. All branches must display the summary prominently. Thus, the public has easy access to this information, and can make informed decisions on where to keep their deposits.

Moral Hazard Looting and Failures of Governance and Supervision

Similar weaknesses of internal control have magnified bank exposure to other credit risks, for example in many cases of widespread bank credit losses in the early 1990s. Reckless expansion of lending played a role in the bank crises of Norway and Sweden, and in losses on commercial property in both New England and in London. This is not to say that weaknesses of internal control always lead to banking crises, since of these examples it is only the Scandinavian cases that qualify as banking crises.

The 1997 Financial Crisis And Its Impact On Financial Reforms

The Thai Credit Bureau Company The Thai Credit Bureau Company was set up in September 1999 as a joint venture between the Government Housing Bank (GHB) and the Processing Centre Co. (owned by commercial banks), to operate under the auspices of the Finance Ministry. The aim of this body was to pool information about borrowers among different financial institutions. The information was expected to cover existing loans, payment and service history, and basic demographic information such as age, assets and dependencies. In the early stage, the bureau focused on consumer loans such as auto leasing, credit cards and personal loans. The bureau relied primarily on information gathered from the GHB's vast pool of mortgage borrowers. Information from other participating banks was expected to be put in the system by the end of 1999, adding to the GHB files already entered in the system. It was believed that the absence of a credit bureau was a major cause of poor credit risk management in the...

Ending The Stranglehold Of Sovietera Debt

Countries are often told that if their debts are cancelled, they will no longer be creditworthy. This argument is backward. If a country has too much debt, it cannot be creditworthy. Rational investors will not make new loans. If debt cancellation is warranted by financial realities, is negotiated in good faith, and the country pursues sound economic policies afterward, then debt cancellation raises creditworthiness rather than reduces it. After all, a well-governed country with low debts can afford to take on new debts. Debt cancellation cannot be for a lark or whim. It must not be a game to avoid past obligations. Debt cancellation must reflect true social, economic, and political realities. Under those circumstances, a negotiated cancellation of debt can give new hope and new economic opportunities to the debtor country, and renewed creditworthiness. This is exactly what happened with Poland, which returned to the capital markets in the 1990s. Third, and crucially, I saw again the...

The Relaxation of Investment Standards

For a bond reset to work properly, the underlying issuer must be creditworthy. Paradoxically, if the issuer is creditworthy, the reset feature is unnecessary (other than to adjust for appreciable interest rate movements in the economy or minor fluctuations in the issuer's creditworthiness). There is no interest rate, however, that will cause the bonds of a severely distressed issuer to trade at par no matter how much the interest coupon is raised, the downside risk to prospective buyers holds down the bond's market price. Moreover, the higher the rate at which the coupon is reset, the worse off the issuer becomes, as increased debt-service requirements exacerbate the financial distress. At the time of the 25 billion RJR Nabisco leveraged buyout, Wall Street analysts argued that the issuance of 5 billion worth of cram-down debt and preferred stock improved the creditworthiness of RJR's senior debt. To illustrate the fallacy of this argument, suppose KKR had paid 129 rather than 109 per...

The Bioeconomics Of The Ehmg As Adaptive Units Morality And Group Selection Theory

In response to Wilson's comments, I wrote a paper in which I re-interpreted the case studies of successful homogeneous middleman groups (HMGs) in my earlier paper (Landa, 1988) from the perspective of multi-level selection theory (Landa, 2002b).4 I showed that although these merchant groups originated in societies with very different cultures, all of them have adapted to the same environment of underdevelopment (lacking basic infrastructure) of their host countries in the same way. First, they form tightly knit homogeneous merchant groups whose members cooperate among themselves by providing club goods such as contract enforcement, capital, credit information, etc. Second, the various HMGs all have social religious norms that regulate members' behavior, as well as sanctions (including ostracism)

General Impact Of Emu On Banking And Financial Markets

The cost of government debt issues is likely to be lower under EMU. With the removal of currency risk, attention will focus more on the evaluation of credit risk when pricing different EMU countries' debt. The credit-worthiness of individual states will be left to the markets. Rating of government debt will become a more important issue local market underwriting skills will also be increasingly emphasized.

The Functions Of Money

U.S. paper currency and coins are therefore fiat (faith) money since their value as a medium of exchange exceeds their nonmonetary value. In the United States, check-writing accounts are deposits at commercial banks, savings banks, savings and loan associations, and credit unions ownership of funds in these deposit accounts is transferred from one owner to another by the writing of a check.

Applying Financial Arrangements A Case Study

PizzaCo does not have 2.5 million to pay for the new system, thus it considers its finance options. PizzaCo is a small company with an average credit rating, which means that it will pay a higher cost of capital than a larger company with an excellent credit rating. As with any borrowing arrangement, if investors believe that an investment is risky, they will demand a higher interest rate.

Finance Terminology

In all cases, the borrower will pay an interest charge to borrow money. The interest rate is called the cost of capital. The cost of capital is essentially dependent on three factors (1) the borrower's credit rating, (2) project risk and (3) external risk. External risk can include energy price volatility, industry-specific economic performance as well as global economic conditions and trends. The cost of capital (or cost of borrowing ) influences the return on investment. If the cost of capital increases, then the return on investment decreases.

Empirical Measures

It is sometimes suggested that Ml magnitudes should in some way reflect the widespread use of credit-card transactions. The number to be included would in this case presumably be the sum over all credit-card holders of the credit limits amounts that can be utilized without special negotiation. These amounts do not constitute unconditional claims to currency, however, but prenegotiated rights to borrow and repay. That a credit-card purchase does not itself constitute a transfer of the medium of exchange, as a purchase paid for by check does, is evidenced by the need for the purchaser later to repay the credit-card company and for the seller to collect from the credit-card company. For these reasons, it is more appropriate to think of credit-card arrangements as ones that reduce the quantity of the medium of exchange needed to effect a given volume of transactions, rather than as additions to the stock of the medium of exchange.

CLO Structuring

Flow of the underlying asset pool, with the deeply subordinated securities treated as an equity investment. The senior investment group, because of its superior credit protection, has the highest credit rating in the CLO structure. It must at this stage be emphasized that the rating of this senior tranche is generally higher than the average rating of the underlying asset pool because of the tiering of claims and through explicit credit enhancements. The deeply subordinated debt may be unrated or below investment grade. This portion is usually retained by the originating bank or may be transferred to third-party investors who are seeking a higher yield. For example in 1996, according to Moody's Investors Service its speculative grade total return index outperformed US Treasuries by 13 per cent. This junior tranche has characteristics similar to pure equity it rarely carries a coupon, is usually unrated, and in most instances offers the same risk return profile. It is, however, a...

Bank funding

The use of CLO transactions can provide access to a new source of funds, particularly in the medium- to long-term bracket. In most CLO deals - provided there are reliable flows from the obligors - the securitized product can potentially achieve a higher credit rating than a plain, stand-alone bond issue. It has even been argued that banks in the US securitize their best assets and achieve a superior rating for their securitized assets, since the liability can be transferred to an underpriced Federal Deposit Insurance Corporation (FDIC) (Greenbaum and Thakor, 1987). Further, the CLO market allows sub-investment or unrated originating banks access to the international financial markets, which was previously unattainable or expensive. Therefore, with a higher credit rating and where there are lower coupon rates, the originator can effectively reduce its funding costs as opposed to bond issues or even interbank loans. In addition, CLOs, through their access to the capital market, provide...

Systemic Causation

This is not merely a philosophical distinction. There are major practical consequences to the way causation is understood. Treating the causes of higher prices and higher interest rates in low-income neighborhoods as being personal greed or exploitation, and trying to remedy it by imposing price controls and interest rate ceilings only ensures that even less will be (1) In many cases, the middle-class borrower who already has a checking account at the bank from which he wishes to borrow also has an automatic line of credit available with that checking account. When the need for a 15,000 loan arises, there may be no need even to me an application. The borrower simply writes 15,000 more in checks than there is money in the account, and the automatic line of credit covers it, with minimum time and trouble to both the borrower and the bank, since the potential borrower's credit rating was already established when the account was first opened and the size of the line of credit was...

Consumerism D1

The interests of consumers, even at the cost of shareholders' incomes. Action can take the form of lobbying parliaments for legislation, protest marches and legal suits. In response to these campaigns, many Western countries since the 1960s have introduced elaborate consumer protection legislation to ensure that consumers get a fair deal before, during and after buying a good or service. In the USA, for example, the federal trade commission supervises advertising, the Fair Packaging and Labeling Act 1965 prevents inadequate product information on packages and labels, the Consumer Credit Protecting Act 1968 requires a simple statement of the details of loans, the Fair Credit Reporting Act 1970 allows consumers access to their credit reports, and a variety of safety acts protect the users of cars, toys and other products. In the UK, the consumer credit act 1974 provides protection for consumers. However, there are still opponents of consumer protection who argue that regulation is an...

Credit union G2

A friendly society whose members save to provide small loans to other members in need of financial assistance at an interest rate lower than the market rate. The group forming a credit union usually resides in the same area, or works for the same employer or belongs to another association, e.g. a church. In the depressed areas of the UK in the 1980s credit unions became popular alternatives to the main financial institutions. By 1990, 310 were formed in the UK with over 40,000 members the USA has more than 60 million persons in credit unions in Germany they appeared as early as the 1860s.

You Need to Know

Depository institutions (commercial banks, savings and loan associations, and credit unions) borrow savers' money balances and lend them to individuals, businesses, or government. By pooling the funds of many small savers and investing in a diversified portfolio of financial instruments, these institutions reduce the transaction costs and risks associated with lending to a borrower. In the U.S., the Federal Deposit Insurance Corporation (FDIC) insures the liabilities of deposit intermediaries. Savers therefore readily hold these liquid liabilities because they normally offer a higher interest return than money. Because the liabilities are liquid and therefore good stores of value, the Federal Reserve presents an M1, M2, and M3 definition of money. The Ml definition is a transaction definition and consists of currency and checking accounts, while M2 and M3 add other liquid financial instruments to the M1 definition.

July 19 1944

These conditions hardly seem likely to be filled, however, under the proposed international bank plan as envisaged by its framers. Lord Keynes has proposed that the commission to be paid by borrowers should be the same for all members, as it would be worse than a mistake to attempt the invidious task of discriminating between members and assessing their credit-worthiness. This seems to mean that bad borrowers with bad records and bad internal policies are to pay interest rates no higher than good borrowers with the best records and sound internal policies. When the criterion of credit-worthiness is dismissed as invidious, moreover, the implication is that loans themselves are to be made without regard to it. Under such conditions the proportion of bad loans and of defaults seems certain to be high, and much capital, in a world already faced by grave shortages, is likely to be dissipated in ill-advised enterprises.

Basic Banking

The process of transforming assets and providing a set of services (check clearing, record keeping, credit analysis, and so forth) is like any other production process in a firm. If the bank produces desirable services at low cost and earns substantial income on its assets, it earns profits if not, the bank suffers losses.


A number of circumstances may warrant the use of finance against collections without recourse to the exporter. This may happen where the bills are 'avalized' by an overseas bank. This may also be the case where the bills are accepted by a foreign company with a strong credit rating. In the case of a bill of exchange avalized by an overseas bank (that is, the importer's bank) it is not necessary to establish a credit limit in the name of the exporter, since the liability is marked against the overseas bank. Generally, the avalized bill would be held on behalf of the presenting collecting bank (which may also be the avalizing bank) for presentation and payment at maturity. The exporter's bank in the UK would then obtain authenticated confirmation from the overseas bank that the bill has been avalized and that an unconditional undertaking to pay at maturity has been given. Opportunities to provide non-recourse finance to the exporter occasionally arise where the overseas importer has a...

Accounts Payable

Accounts payable represent bills from suppliers for goods or services purchased on credit. Generally this debt must be paid within 12 months. It is important to track accounts payable in a timely manner in order to know how much each supplier is owed and when payment is due. If a business has a timely system in place to manage accounts payable, it may often be able to take advantage of discounts that are provided for timely payments. A poorly managed supplier system can damage a relationship with a supplier and earn a business a poor credit rating.


The distinction between personal and impersonal transactions is not sharp. Even in a sophisticated market (modern banking), reputation plays a part (credit rating of the borrower). But the distinction is real. Meeting new people in Becky's world is often accidental, but people spend resources in order to make new acquaintances. Why One reason is that new acquaintances may be in a position to provide information.

Latin America

However, the basic parameters had changed by the early 1980s. By then, the OECD countries were pushing anti-inflationary policy very vigorously. The change to restrictive monetary policy initiated by the United States Federal Reserve pushed up interest rates suddenly and sharply. The dollar appreciated and world export prices began to fall. The average real interest cost of floating rate dollar debt rose to nearly 16 per cent in 1981-83 compared with minus 8.7 per cent in 1977-80. Between 1973 and 1982 external debt had increased sevenfold and the creditworthiness of Latin America as a whole was grievously damaged by Mexico's debt delinquency in 1982. The flow of voluntary private lending stopped abruptly, and created a massive need for retrenchment in economies teetering on the edge of hyperinflation and fiscal crisis. In most countries resource allocation was distorted by subsidies, controls, widespread commitments to government enterprise, and detailed interventionism. Most of them...

Junk bond G0

High-yielding, high-risk bonds rated below the investment grades assigned by the top US bond credit rating agencies Standard & Poor and Moody's. Although the risk of default is great, their high yield has made them very popular. Also, they have provided a vehicle for entrepreneurs to take over slumbering corporations. Junk bonds first made their appearance in the

Economies of scale

The most obvious factor here is that large firms can often borrow at a lower interest rate, because they have a better credit rating, representing a lower default premium. In addition they have more sources of finance they can use the capital markets, for example by issuing commercial paper, bonds and shares. These forms of raising finance often involve a lower cost of capital. Finally, a larger firm can enable its supplier of funds, normally a bank, to gain economies of scale of an administrative nature. Again these economies are clearly monetary and at the level of the whole firm.

Interest Rate Swaps

As we have just seen, financial institutions do have to be aware of the possibility of losses from a default on swaps. As with a forward contract, each party to a swap must have a lot of information about the other party to make sure that the contract is likely to be fulfilled. The need for information about counterparties and the liquidity problems in swap markets could limit the usefulness of these markets. However, as we saw in Chapter 8, when informational and liquidity problems crop up in a market, financial intermediaries come to the rescue. That is exactly what happens in swap markets. Intermediaries such as investment banks and especially large commercial banks have the ability to acquire information cheaply about the creditworthiness and reliability of parties to swap contracts and are also able to match up parties to a swap. Hence large commercial banks and investment banks have set up swap markets in which they act as intermediaries.

Summing Up

The U.S. economy contains a large variety of financial institutions. In addition to the bond market, the stock market, banks, and mutual funds, there are also pension funds, credit unions, insurance companies, and even the local loan shark. These institutions differ in many ways. When analyzing the macroeconomic role of the financial system, however, it is more important to keep in mind the similarity of these institutions than the differences. These financial institutions all serve the same goal directing the resources of savers into the hands of borrowers.

Defining Contagion

Only one study that we are aware of examined the issue of contagion in the context of Latin America's debt crisis of the 1980s. Doukas (1989) interprets contagion as the influence of ''news'' about the creditworthiness of a sovereign borrower on the spreads charged to the other sovereign borrowers, after controlling for country-specific macroeconomic fundamentals. Most other studies, such as Valdes (1997), define contagion as excess comovement in asset returns across countries, be it for debt or equity. This comovement is said to be excessive if it persists even after common fundamentals, as well as idiosyncratic fundamental factors, have been controlled for. A recent variant to this approach (as in Forbes and Rigobon 1998) defines ''shift-contagion'' as an increase in excess comove-ment of asset returns during crisis periods.

Obligor Credit Risk

Obligor credit risk is the core risk for all financing transactions and simply translates to the end user's ability to satisfy all of its obligations (payment and otherwise) under the terms of the transaction. Despite the wide variety of financing structures for energy services transactions, their common foundation is the end user's obligation to make payments in exchange for the products or services received. In whatever form it takes (i.e. lease payment, loan payment, services payment, usage payment, etc.), that payment obligation provides the lender's primary source of debt service and return on the equity investment, if any. As a result, the bulk of the lender's underwriting activities are focused on a detailed analysis of the end-user's overall credit profile. Operating performance, cash flow, debt service capacity, liquidity, balance sheet strength, market position, management capabilities and future projections are among the many factors thoroughly examined during the...

ESCO Credit Risk

Approval of the ESCO's credit profile. The ESCO should be prepared to provide at least three years audited financial statements, historical performance data and any other information necessary to underwrite the transaction. Depending on the credit strength of the ESCO, the lender may impose additional credit conditions such as performance bonds and parent guarantees.

Deposit Replacement

3 A good example of a bank with a poor credit rating was BCCI. Because of its low credit standing, BCCI had to have a higher rate of interest in the money market for any funds raised. This enabled institutions with a better credit standing to undertake arbitrage by borrowing funds in the market and on-lending them to BCCI at a higher rate. Obviously, a loss was involved in this arbitrage when BCCI was closed and became bankrupt.

Payment Obligations

Payment obligations are closely related to and sometimes a function of the separation of performance and credit risk. The lender's preferred structure is to have a hell or high water payment obligation directly from the end user obligor regardless of ESCO performance. This is typically the case with basic debt financing and enables the lender to perform a standard analysis of the obligor's creditworthiness and underwrite the transaction if that analysis indicates a high likelihood of repayment. In a structure where the end user obligor does have the right to suspend payment due to alleged or actual performance deficiencies, the lender will look to the ESCO to guarantee repayment. In all cases, the clear separation of performance and credit risk is critical to the lender's ability to preserve the hell or high water nature of the repayment obligation. If done properly, the lender's risk will be limited solely to the creditworthiness of the end user obligor or, in a performance guarantee...

Assignment Rights

The lender's unlimited right of assignment is a critical component of a bankable transaction. Without this feature, the deal will be completely isolated from the capital markets and extremely difficult, if not impossible, to fund. This reality stems from the fact that all lenders must maintain liquidity in their investment portfolios by having the right to sell (i.e. assign) their paper to other investors in the secondary market. Conversely, liquidity is further enhanced by prohibiting or precisely limiting the assignment rights of the other party or parties to the transaction. This is a necessary recognition of the fact that the lender's investment decision is based on the creditworthiness of the original obligor. By controlling the obligor's right of assignment, the lender can prevent credit and portfolio deterioration which would result from assumption of the borrower's obligations by an entity with weaker credit profile than the original obligor.

Project Financing

A lack of Project Financing is the most significant barrier to an ESCO because it is fundamental to the core business model offered by an ESCO to its customer, which is that the customer will not have to provide any capital to implement the EEP. The investment will be arranged or provided by the ESCO, and it will be repaid from the savings of the EEPs. It is so fundamental to the ESCO's business model, that an ESCO cannot consider doing business in a country where it cannot obtain a long-term reliable source for financing its EEPs. The Project Financing barrier is difficult to overcome because there is rarely an established local banking system in an emerging market that is familiar with or comfortable with financing energy savings projects on a debt basis and for periods of 7 to 10 years. The problem is compounded by the relative small size of EEPs in relation to large independent power projects. The small size also equates to a perceived small market size, which makes it very...

The Mexican Crisis

Possibly more importantly, the IMF's actions created a perception that they would continue to bail out investors in future crises. This created the much-discussed moral hazard problem. Since the international agencies could be expected to come to a country's aid in times of crisis, investors no longer had to worry so much about the creditworthiness of their counterparts and so took on riskier propositions than they would usually. This implication of the IMF's newly acquired role as crisis manager and lender would be a recurring theme in subsequent crises.

Risk Typology

First, the price of the loan has to reflect the riskiness of the venture. But bear in mind the problems of loading all of the price on to the rate of interest charged in the context of credit rationing, which were examined in Chapter 8. Second, since the rate of interest cannot bear all of the risk, some form of credit limit is placed. This would hold particularly for firms that have little accounting history, such as startups. Third, there are collateral and administrative conditions associated with the loan. Collateral can take many forms but all entail the placing of deed titles to property with the bank so that the property will pass to the bank in the event of default. Administrative arrangements include covenants specifying certain behaviour by the borrower. Breach of the covenants will cause the loan to be cancelled and collateral liquidated. The evaluation of the risk premium will involve a combination of managerial judgement, as in traditional...

M kB with k 1134

Institutions that undertake to redeem their deposit liabilities at par. The value of the liabilities of a mutual fund bank will, as with any mutual fund, always reflect the current value of its assets. More significantly, mutual funds are not subject to runs there is no incentive for mutual fund depositors to form a queue to redeem investments whose value is continuously marked to market. In this system, to pay for goods or services, the buyer offers electronic money issued by a mutual fund of his choice. The seller's point of sale terminal immediately communicates through the clearing system with the buyer's mutual fund, confirming the buyer's payment instruction and the seller's instruction to transfer funds to the mutual fund of his choice. We can point out that the credit worthiness of the buyer can be instantaneously verified by the seller through the immediate electronic access to the buyer's wealth account. There is no more need for the holding of the bank's reserve. Together...

Bernankes Challenges

One challenge arose from problems in the housing market and the financial system. From 1995 to 2006, the US. housing market was booming, and average US. house prices more thin doubled. This housing boom, together with a perie* of low interest rates, encouraged many households to borrow and buy real estate. Some of these new homeowners were subprme given their down payments, incomes, and credit histories, they were considered at high risk of default.

Distressed Debt

The stressed bonds are still paying interest, but the underlying companies are struggling under excessive levels of debt. These bonds will be trading at a substantial discount to par A bond originally issued at 100 may be trading at 80 or less. The buyer of the distressed bonds gets a higher current yield (coupon divided by price) than the buyer of the newly issued bonds. In addition, he gets an opportunity for capital appreciation. Some stressed bonds are bonds that started their lives as low-quality, high-yield bonds, and then became even lower quality. Other stressed bonds, the so-called fallen angels, started out as investment-grade bonds and then ran into financial problems that lowered both their credit rating and their price.

Managing Credit Risk

Adverse selection in loan markets occurs because bad credit risks (those most likely to default on their loans) are the ones who usually line up for loans in other words, those who are most likely to produce an adverse outcome are the most likely to be selected. Borrowers with very risky investment projects have much to gain if their projects are successful, and so they are the most eager to obtain loans. Clearly, however, they are the least desirable borrowers because of the greater possibility that they will be unable to pay back their loans. Screening. Adverse selection in loan markets requires that lenders screen out the bad credit risks from the good ones so that loans are profitable to them. To accomplish effective screening, lenders must collect reliable information from prospective borrowers. Effective screening and information collection together form an important principle of credit risk management.

Documentary Credits

Although L Cs are more beneficial and convenient for the exporters, they also bring many benefits to the importers. First, the importer can obtain help and advice from the issuing bank (usually his her own regular bank which was prepared to issue the L C in the first place and which will be subject to the importer's credit rating) in calling for appropriate documents to be presented under the L C. Second, the importer can insist on shipment of goods within a reasonable period of time by fixing a last date for shipment and presentation of documents. Third, payment will not have to be made unless documents are presented in accordance with L C terms and conditions this feature is often misused. Fourth, the importers may be able to obtain a longer period of credit or a better price under the commercial contract when using an L C rather than with a less secure method of The most secure way of trading for the exporter may also mean some disadvantages for the importer under the L C method of...

Credit G2

In the past two decades there has been a great increase in the amount of credit given to households on the basis either of collateral (a house in the case of a building society mortgage) or of credit scoring for hire purchase expenditure on consumer durables. The creation of new credit instruments, e.g. the credit card, has resulted in an expansion in the total volume of credit.


The relative decline in Britain's economy, compared with other industrial countries, during the first eight decades of the twentieth century was clearly a factor limiting her ability to compete as a military power. Even so, output per person remained above French and German levels until the 1960s. Since Britain spent a higher proportion of her national income on defence than other Western European countries after 1945, her military expenditure remained greater than France's until 1968 and West Germany's until 1970. The disparity between Britain, on the one hand, and the United States and the Soviet Union, on the other, as regards ability to produce the full range of weapons systems was not obvious until the 1950s. From 1950 to 1969, however, total British defence expenditure averaged about 9.4 per cent of the American level and her attempt to match the superpowers' range of research and development with much more limited numbers of scientific and technological personnel resulted in...


Similarly, in our situation, we can imagine a market of third-party raters that post judgments of the likelihood that transfer of a given title will actually be honored (Stanley 2001, personal communication). Simply recording each village's track record of honoring past title transfers, and assuming the future will be like the recent past, is a low overhead procedure that is plausibly adequate. And it places each village in an iterated game with the system as a whole, providing it an incentive to treat these titles as legitimate claims, subjecting them to the local tradition's means of enforcement. We can think of this as a credit report, not for an individual, but for a village and its system of local law.

Beyond Group Lending

A credit agency can help address this problem, such that banks can investigate credit histories of prospective clients, but we know of no such agencies serving microfinance populations. 20. The need for credit bureaus is made forcefully by Mcintosh and Wydick (2002) who show cases where, in principle, competition can worsen the lot of the poorest households. Competition can, in particular, make it difficult to cross-subsidize the poorest borrowers.

The dotcom Bubble

Beginning in 2004, Fannie and Freddie entered the subprime market on a large scale, relying on their implicit guarantee to hold down borrowing costs. Increasingly competitive securitization also reduced the incentive of the original lenders to monitor the creditworthiness of borrowers once they had packaged the mortgages into securities they were no longer exposed to the risk of default, and the demand for securities was so strong that quality was not a major problem. These and other devices, combined with optimistic assumptions about default and repayment rate, made it appear that the risks associated with lending could be made to vanish. With the blessing of ratings agencies such as Moody's and Standard & Poor's, loans to people who might have neither a regular income, nor a job, nor any asset except the house itself were transformed into super-senior bonds given the same AAA credit rating accorded to the U.S. government itself.18

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