A0229
Title: The information advantage of banks: Evidence from their private credit assessments
Authors: Mehdi Beyhaghi - Federal Reserve Board (United States) [presenting]
Abstract: In classic theories of financial intermediation, banks mitigate information frictions by monitoring and producing information about borrowers. However, it is difficult to test these theories without access to banks' private information. Supervisory data containing banks' private assessments of their loans' expected losses is used. It is shown that changes in expected losses predict firms' future stock returns, bond returns, and earnings surprises, and that banks use this information to allocate credit. Findings show that banks' information production and monitoring create an information advantage over financial markets, even among publicly traded firms.
