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Credit Cycles, Credit Risk, and Prudential Regulation

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Author Info

  • Gabriel Jiménez

    (Banco de Espana)

  • Jesús Saurina

    (Banco de Espana)

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    Abstract

    This paper finds strong empirical support of a positive, although quite lagged, relationship between rapid credit growth and loan losses. Moreover, it contains empirical evidence of more lenient credit standards during boom periods, both in terms of screening of borrowers and in collateral requirements. We find robust evidence that during upturns, riskier borrowers get bank loans, while collateralized loans decrease. We develop a regulatory prudential tool, based on a countercyclical, or forward-looking, loan loss provision that takes into account the credit risk profile of banks’ loan portfolios along the business cycle. Such a provision might contribute to reinforce the soundness and the stability of banking systems.

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    File URL: http://www.ijcb.org/journal/ijcb06q2a3.htm
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    Bibliographic Info

    Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

    Volume (Year): 2 (2006)
    Issue (Month): 2 (May)
    Pages:

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    Handle: RePEc:ijc:ijcjou:y:2006:q:2:a:3

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    References

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