Loan Spreads and Credit Cycles: The Role of Lenders' Personal Economic Experiences

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