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Bank lending to the production sector: credit crunch or extra-credit?

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  • Di Giulio, Daniele

Abstract

This paper provides empirical evidence to support the theory that, in Italy, over the course of the past two years, even though a considerable slowdown in bank lending has been recorded, there has not been a credit crunch. After a first section dedicated to a descriptive analysis of the data, the paper presents an econometric estimation of the production sector’s demand for bank loans. An Error Correction Model (ECM) is used – estimated for the pre-crisis period (1998.Q2 – 2007.Q2) and applied both with the one and two step procedure – which considers lending as a function of the added value of the private sector, of the gross operating margin to nominal added value ratio (a proxy for self-financing) and of the real interest rate applied to loans. To test the robustness of the results obtained in the first specification of the model, we remove the assumption of weak exogeneity of the independent variables of the single equation model and construct a multivariate multi-equation model (VECM). All of the different approaches and methods adopted provided similar results: as expected, the demand for credit increases as real added value increases and decreases as the cost of lending and self-financing increase. The dynamic out-of-sample forecast of the model, relating to the two-year period of economic and financial crisis (2007.Q3 – 2009.Q2), shows that the actual loan stock remained well above the “theoretical” level forecasted on the basis of the functional relationships estimated before the crisis. This delta (which can be defined as “extra-credit”) is interpreted as the outcome of a rightward shift of the credit supply curve, rather than a leftward shift as would have happened in a credit crunch scenario.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 26824.

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Date of creation: Nov 2009
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Handle: RePEc:pra:mprapa:26824

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Related research

Keywords: credit crunch; Italian banks; bank lending; production sector; loan demand; error correction model; cointegration;

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References

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  1. Calza, Alessandro & Gartner, Christine & Sousa, João, 2001. "Modelling the demand for loans to the private sector in the euro area," Working Paper Series, European Central Bank 0055, European Central Bank.
  2. Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, Elsevier, vol. 52(3), pages 389-402, June.
  3. Leonardo Gambacorta & Carlotta Rossi, 2007. "Modelling bank lending in the euro area: A non-linear approach," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 650, Bank of Italy, Economic Research and International Relations Area.
  4. Antonio Bassanetti & Martina Cecioni & Andrea Nobili & Giordano Zevi, 2011. "Le principali recessioni italiane: un confronto retrospettivo," Rivista di Politica Economica, SIPI Spa, SIPI Spa, issue 3, pages 281-318, JULY-SEPT.
  5. Calza, Alessandro & Manrique, Marta & Sousa, Joao, 2006. "Credit in the euro area: An empirical investigation using aggregate data," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 46(2), pages 211-226, May.
  6. Christoffer Kok Sørensen & David Marqués Ibáñez & Carlotta Rossi, 2012. "Modelling loans to non-financial corporations in the euro area," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 857, Bank of Italy, Economic Research and International Relations Area.
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