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Cyclical Patterns in Profits, Provisioning and Lending of Banks

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  • J.A. Bikker
  • H. Hu

Abstract

The proposed risk sensitive minimum requirements of the new Basel capital accord have raised concerns about possible (acceleration of) procyclical behaviour of banking, which might threaten macroeconomic stability. This paper analyses the interaction between business cycles and bank behaviour over the past two decades for 26 industrial countries. As expected, profits appear to move up and down with the business cycle, allowing for accumulation of capital in boom periods. Provisioning for credit losses rise when the cycle falls, but less so when net income of banks is relatively high, which reduces procyclicality. Lending fluctuates with the business cycle too, but appears to be driven by demand rather than by supply factors such as (shortage of) capital, which contradicts the assumptions underlying capital crunch theory. All in all, over the last decades, distortion caused by procyclical behaviour of banks has been limited, banking crises excepted.

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Bibliographic Info

Paper provided by Netherlands Central Bank in its series DNB Staff Reports (discontinued) with number 86.

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Length: 33 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:dnb:staffs:86

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Keywords: profits; credit loss provisioning; lending; business cycle; credit crunch; bank lending;

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  1. Demirguc-Kunt, Asli & Huizinga, Harry, 2000. "Financial structure and bank profitability," Policy Research Working Paper Series 2430, The World Bank.
  2. Reinhart, Carmen & Levich, Richard & Majoni, Giovanni, 2002. "Ratings, rating agencies and the global financial system: Summary and policy implications," MPRA Paper 13249, University Library of Munich, Germany.
  3. Gorton, Gary & Rosen, Richard, 1995. " Corporate Control, Portfolio Choice, and the Decline of Banking," Journal of Finance, American Finance Association, vol. 50(5), pages 1377-1420, December.
  4. Demirguc-Kunt, Asli & Huizinga, Harry, 1998. "Determinants of commercial bank interest margins and profitability : some international evidence," Policy Research Working Paper Series 1900, The World Bank.
  5. Kevin L. Kliesen & John A. Tatom, 1992. "The recent credit crunch: the neglected dimensions," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 18-36.
  6. Arestis, Philip & Demetriades, Panicos O & Luintel, Kul B, 2001. "Financial Development and Economic Growth: The Role of Stock Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(1), pages 16-41, February.
  7. Claudio Borio & Craig Furfine & Philip Lowe, 2001. "Procyclicality of the financial system and financial stability: issues and policy options," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 1-57 Bank for International Settlements.
  8. Joe Peek & Eric Rosengren, 1993. "The Capital Crunch: Neither A Borrower Nor A Lender Be," Boston College Working Papers in Economics 243, Boston College Department of Economics.
  9. Mario Tonveronachi, 2001. "Structural biases in prudential regulation of banks," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 54(219), pages 341-353.
  10. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  11. Simon Kwan & Randy O'Toole, 1997. "Recent developments in loan loss provisioning at U.S. commercial banks," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jul25.
  12. Berger, Allen N & Udell, Gregory F, 1994. "Do Risk-Based Capital Allocate Bank Credit and Cause a "Credit Crunch"' in the United States?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 585-628, August.
  13. Brinkmann, Emile J & Horvitz, Paul M, 1995. "Risk-Based Capital Standards and the Credit Crunch," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 848-63, August.
  14. Steven A. Sharpe, 1995. "Bank capitalization, regulation, and the credit crunch: a critical review of the research findings," Finance and Economics Discussion Series 95-20, Board of Governors of the Federal Reserve System (U.S.).
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