We examine the discretionary activities that CLO managers engage in to pass monthly overcollateralization (OC) tests. These tests require a CLO's loan portfolio value, scaled by the CLO notes’ principal balance, to be above a certain threshold. Using CLOs’ granular disclosures, we develop model-free estimates for discretionary loan fair valuation and transaction-based proxies for strategic loan trading. We find a positive association between these discretionary activities and the probability of avoiding an OC test violation. This association varies predictably with junior noteholders’ influence and CLO market conditions. Strategic trading—but not discretionary fair valuation—relates to worse future CLO performance.

We explore whether transparency in banks’ securitization activities enhances loan quality. We take advantage of a novel disclosure initiative introduced by the European Central Bank, which requires, as of January 2013, banks that use their asset‐backed securities as collateral for repo financing to report securitized loan characteristics and performance in a standardized format. We find that securitized loans originated under the transparency regime are of better quality with a lower default probability, a lower delinquent amount, fewer days in delinquency, and lower losses upon default. Additionally, banks with more intensive loan level information collection and those operating under stronger market discipline experience greater improvement in their loan quality under the new reporting standards. Overall, we demonstrate that greater transparency has real effects by incentivizing banks to improve their credit practices.

We explore whether cognitive constraints and behavioral biases impede the processing and interpretation of soft information in private lending. Using data from a credit union's internal reporting system, we delineate three constraints and biases likely to affect lending decisions: limited attention, task-specific human capital and common identity. We find that soft information leads to worse loan quality when loan officers are busy or before weekends and around national holidays; when they have prior sales experience; and when both the officers and borrowers are men. We provide evidence of non-agency-related costs in the use of soft information in lending decisions.

We explore whether the introduction of transparent reporting rules increases credit standard harmonization within a bank. We exploit the new loan-level reporting rules imposed on banks that borrow from the European Central Bank using repurchase agreements collateralized by their asset-backed securities. We compare credit terms of similar mortgages issued by a bank across a country's regions and find that harmonization increases following the adoption of the new reporting rules. Learning and regulatory scrutiny constitute mechanisms underlying this economic effect. We also show that harmonization leads to more favorable lending terms to borrowers and higher loan quality for banks. Overall, these findings suggest that transparent reporting rules incentivize banks to improve their internal decision-making and thereby reduce regional divergence in their credit standards.