Loan Spreads and Credit Cycles: The Role of Lenders' Personal Economic Experiences
67 Pages Posted: 24 Jun 2019 Last revised: 23 May 2022
Date Written: May 19, 2022
Abstract
Do changes in lender optimism lead to excessive fluctuations in credit spreads across the credit cycle? Using data on the real estate properties of loan officers originating large corporate loans, we analyze the role of sophisticated lenders’ personal economic experiences as a mechanism driving such fluctuations. We provide evidence that lenders overweight their recent locally experienced economic conditions, captured by local housing price growth, and this systematically shapes credit spreads for borrowers that own real estate assets and riskier loans. Our analysis suggests that these effects are driven by the beliefs of sophisticated lenders about real estate values.
Keywords: Credit Spreads, Credit Cycles, Lender Optimism, Personal Experiences
JEL Classification: G20, G02, G21
Suggested Citation: Suggested Citation