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Credit Cycles, Credit Risk, and Prudential Regulation

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  • Jesus, Saurina
  • Gabriel, Jimenez
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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://mpra.ub.uni-muenchen.de/718/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 718.

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    Date of creation: 20 Mar 2006
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    Publication status: Published in International Journal of Central Banking Number 2.Volume(2006): pp. 65-98
    Handle: RePEc:pra:mprapa:718

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    Keywords: credit risk; lending cycles; loan loss provisions; bank capital; collateral;

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