This paper questions the view that credit rating agencies aggravated the East Asian crisis by excessively downgrading those countries. I find that ratings are, if anything, sticky rather than procyclical. Assigned ratings exceeded predicted ratings before the crisis, mostly matched predicted ratings during the crisis period, and did not increase as much as predictions in the period after the crisis. Ratings are also found to react to non-macroeconomic factors such as lagged spreads and a country’s default history. Therefore it is questionable that ratings exacerbate the boom-bust cycle if they are simply reacting to news, whether macroeconomic or market.

This paper investigates what induces small firms in an emerging market economy to borrow dollar credit from domestic banks. Our data are from a unique survey of firms in Lebanon. The findings complement studies of large firms with foreign currency loans from foreign lenders. Exporters, naturally hedged against currency risk, are more likely to incur dollar debt. Firms also partly hedge themselves by passing currency risk to customers and suppliers. Less opaque firms with easily verifiable collateral and higher net worth are more likely to access dollar credit. Firms reliant on formal financing (banks and supplier credit) are more likely to contract dollar debt than firms reliant on informal financing (family, friends and moneylenders). Bank relationships, however, do not increase the dollar debt likelihood. And finally, profitable firms are less likely to have dollar debt. Information frictions and limited collateral, therefore, constrain dollar credit even when it is intermediated domestically.

One key risk to the banking system is how funding costs will change as monetary policy is normalized and interest rates rise after almost a decade of near-zero rates. Our contribution is to develop a model that jointly estimates banks’ balance sheets and retail interest rates to arrive at a consistent estimate of the change in bank funding costs as market rates change. Our estimates imply a 100 basis-point shock to the Federal Funds rate would increase overall deposit funding costs by about $40 billion, which is roughly equal to 25% of aggregate annual net income for commercial banks and savings institutions. We also find that deposit rate responses are largely symmetric, in contrast to some previous research showing deposit rates are less responsive to upward movements in reference rates. We introduce unique and confidential data on bank deposit betas to anchor our results.