RECOVERY FROM THE 2008-2009 FINANCIAL MELTDOWN: EVALUATION OF CREDIT AND CHANGES IN THE ANALYSIS OF BORROWER’S RISK

Elvan Aktas
Valdosta State University
ABSTRACT
For decades, financial markets relied on a consistent and fairly well-functioning group of
variables to evaluate liquidity needs, short-term fluctuations in money markets, and finally, credit
worthiness of borrowers. These traditional risk assessment variables worked fairly well in the past,
even during the crises of the second half of the last century: such as the two oil crises during the
70’s, savings-and-loans crisis in the 80’s, stock market crash of 1997, Long-term capital
management ( LTCM) crisis in 1997-1998, and the “dotcom” bubble in 2000. This study examines
the unexpected behavior in some of the traditional risk measures in the credit markets and how their
relevance changed during the recovery from the financial meltdown of 2008-2009. It utilizes
historical data for 2007-212 from micro-financing markets and evaluation of creditworthiness of
their borrowers. The results suggest that homeownership was considered a negative signal by
microfinancing outlets immediately after the financial meltdown (2008-2009), until the market
started recovering from the liquidity shocks caused by the financial crisis.