Bad Times, Good Credit

Abstract

Asymmetric information between lenders and borrowers is understood to be a key friction in credit markets. Can amplified information problems explain why the supply of corporate credit contracts in recessions and crises? Alternatively, asymmetric information may be reduced by economic slowdowns. We test these opposing views of information frictions in the credit market using data on lending from a large bank, through two business cycles. We find that this banks’ ability to sort borrowers by credit quality is best in bad times. This suggests that information frictions are counter-cyclical in corporate credit markets.