IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v99y2019icp237-251.html
   My bibliography  Save this article

Competition and credit procyclicality in European banking

Author

Listed:
  • Leroy, Aurélien
  • Lucotte, Yannick

Abstract

This paper empirically assesses how competition in the banking sector affects credit procyclicality by estimating both an interacted panel VAR model using macroeconomic data and a single-equation model with bank-level data. These two empirical approaches show that a deviation of actual GDP from potential GDP leads to greater credit fluctuations in economies where bank competition is weak. This suggests that increased market power for banks increases the financial accelerator mechanism, which is consistent with recent macroeconomic models showing that monopolistic banking tends to increase macroeconomic volatility by making credit cheaper during booms and more expensive during recessions.

Suggested Citation

  • Leroy, Aurélien & Lucotte, Yannick, 2019. "Competition and credit procyclicality in European banking," Journal of Banking & Finance, Elsevier, vol. 99(C), pages 237-251.
  • Handle: RePEc:eee:jbfina:v:99:y:2019:i:c:p:237-251
    DOI: 10.1016/j.jbankfin.2018.12.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426618302711
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    2. Stijn Claessens & Luc Laeven, 2004. "What drives bank competition? Some international evidence," Proceedings, Federal Reserve Bank of Cleveland, pages 563-592.
    3. Claudio Borio, 2014. "The financial cycle and macroeconomics: what have we learned and what are the policy implications?," Chapters,in: Financial Cycles and the Real Economy, chapter 2, pages 10-35 Edward Elgar Publishing.
    4. Bouvatier, Vincent & López-Villavicencio, Antonia & Mignon, Valérie, 2012. "Does the banking sector structure matter for credit procyclicality?," Economic Modelling, Elsevier, vol. 29(4), pages 1035-1044.
    5. Towbin, Pascal & Weber, Sebastian, 2013. "Limits of floating exchange rates: The role of foreign currency debt and import structure," Journal of Development Economics, Elsevier, vol. 101(C), pages 179-194.
    6. repec:eee:jbfina:v:83:y:2017:i:c:p:104-120 is not listed on IDEAS
    7. Roger Aliaga‐Díaz & María Pía Olivero, 2010. "Macroeconomic Implications of “Deep Habits” in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(8), pages 1495-1521, December.
    8. Beck, Thorsten & De Jonghe, Olivier & Schepens, Glenn, 2013. "Bank competition and stability: Cross-country heterogeneity," Journal of Financial Intermediation, Elsevier, vol. 22(2), pages 218-244.
    9. Beltratti, Andrea & Morana, Claudio, 2010. "International house prices and macroeconomic fluctuations," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 533-545, March.
    10. Fungáčová, Zuzana & Solanko, Laura & Weill, Laurent, 2014. "Does competition influence the bank lending channel in the euro area?," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 356-366.
    11. Jan Boone, 2008. "A New Way to Measure Competition," Economic Journal, Royal Economic Society, vol. 118(531), pages 1245-1261, August.
    12. Akins, Brian & Li, Lynn & Ng, Jeffrey & Rusticus, Tjomme O., 2016. "Bank Competition and Financial Stability: Evidence from the Financial Crisis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(01), pages 1-28, February.
    13. Athanasoglou, Panayiotis P. & Daniilidis, Ioannis & Delis, Manthos D., 2014. "Bank procyclicality and output: Issues and policies," Journal of Economics and Business, Elsevier, vol. 72(C), pages 58-83.
    14. Berger, Allen N. & Mester, Loretta J., 1997. "Inside the black box: What explains differences in the efficiencies of financial institutions?," Journal of Banking & Finance, Elsevier, vol. 21(7), pages 895-947, July.
    15. Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
    16. Federico S. Mandelman, 2011. "Business Cycles and the Role of Imperfect Competition in the Banking System," International Finance, Wiley Blackwell, vol. 14(1), pages 103-133, April.
    17. Moritz Schularick & Alan M. Taylor, 2012. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles, and Financial Crises, 1870-2008," American Economic Review, American Economic Association, vol. 102(2), pages 1029-1061, April.
    18. Mathias Drehmann & Claudio Borio & Kostas Tsatsaronis, 2012. "Characterising the financial cycle: don't lose sight of the medium term!," BIS Working Papers 380, Bank for International Settlements.
    19. Fu, Xiaoqing (Maggie) & Lin, Yongjia (Rebecca) & Molyneux, Philip, 2014. "Bank competition and financial stability in Asia Pacific," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 64-77.
    20. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
    21. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    22. Pierre-Olivier Gourinchas & Maurice Obstfeld, 2012. "Stories of the Twentieth Century for the Twenty-First," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 226-265, January.
    23. Turk Ariss, Rima, 2010. "On the implications of market power in banking: Evidence from developing countries," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 765-775, April.
    24. John Muellbauer & Anthony Murphy, 2008. "Housing markets and the economy: the assessment," Oxford Review of Economic Policy, Oxford University Press, vol. 24(1), pages 1-33, spring.
    25. Albertazzi, Ugo & Gambacorta, Leonardo, 2009. "Bank profitability and the business cycle," Journal of Financial Stability, Elsevier, vol. 5(4), pages 393-409, December.
    26. Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, vol. 49(6), pages 1417-1426, November.
    27. Bertay, Ata Can & Demirgüç-Kunt, Asli & Huizinga, Harry, 2015. "Bank ownership and credit over the business cycle: Is lending by state banks less procyclical?," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 326-339.
    28. repec:cii:cepiie:2015-q1-141-70 is not listed on IDEAS
    29. Aurélien Leroy & Yannick Lucotte, 2015. "Heterogeneous monetary transmission process in the Eurozone: Does banking competition matter?," International Economics, CEPII research center, issue 141, pages 115-134.
    30. Borio, Claudio, 2014. "The financial cycle and macroeconomics: What have we learnt?," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 182-198.
    31. Charles Goodhart & Boris Hofmann, 2008. "House prices, money, credit, and the macroeconomy," Oxford Review of Economic Policy, Oxford University Press, vol. 24(1), pages 180-205, spring.
    32. Fungáčová, Zuzana & Shamshur, Anastasiya & Weill, Laurent, 2017. "Does bank competition reduce cost of credit? Cross-country evidence from Europe," Journal of Banking & Finance, Elsevier, vol. 83(C), pages 104-120.
    33. James D. Hamilton, 2017. "Why You Should Never Use the Hodrick-Prescott Filter," NBER Working Papers 23429, National Bureau of Economic Research, Inc.
    34. Anginer, Deniz & Demirguc-Kunt, Asli & Zhu, Min, 2014. "How does competition affect bank systemic risk?," Journal of Financial Intermediation, Elsevier, vol. 23(1), pages 1-26.
    35. repec:cii:cepiei:2015-q1-141-7 is not listed on IDEAS
    36. repec:elg:eechap:16878_10 is not listed on IDEAS
    37. Klaus Schaeck & Martin Cihák, 2012. "Banking Competition and Capital Ratios," European Financial Management, European Financial Management Association, vol. 18(5), pages 836-866, November.
    38. Klaus Schaeck & Martin Cihak & Simon Wolfe, 2009. "Are Competitive Banking Systems More Stable?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 711-734, June.
    39. Uhde, André & Heimeshoff, Ulrich, 2009. "Consolidation in banking and financial stability in Europe: Empirical evidence," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1299-1311, July.
    40. Katrin Assenmacher-Wesche & Stefan Gerlach, 2008. "Monetary policy, asset prices and macroeconomic conditions : a panel-VAR study," Working Paper Research 149, National Bank of Belgium.
    41. Allen N. Berger & Leora F. Klapper & Rima Turk-Ariss, 2017. "Bank competition and financial stability," Chapters,in: Handbook of Competition in Banking and Finance, chapter 10, pages 185-204 Edward Elgar Publishing.
    42. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-439, May.
    43. Jiménez, Gabriel & Lopez, Jose A. & Saurina, Jesús, 2013. "How does competition affect bank risk-taking?," Journal of Financial Stability, Elsevier, vol. 9(2), pages 185-195.
    44. Filipa Sá & Pascal Towbin & Tomasz Wieladek, 2014. "Capital Inflows, Financial Structure And Housing Booms," Journal of the European Economic Association, European Economic Association, vol. 12(2), pages 522-546, April.
    45. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and Banking in a DSGE Model of the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 107-141, September.
    46. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
    47. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October.
    48. Norman V. Loayza & Claudio Raddatz, 2007. "The Structural Determinants of External Vulnerability," World Bank Economic Review, World Bank Group, vol. 21(3), pages 359-387, October.
    49. Michael Koetter & James W. Kolari & Laura Spierdijk, 2012. "Enjoying the Quiet Life under Deregulation? Evidence from Adjusted Lerner Indices for U.S. Banks," The Review of Economics and Statistics, MIT Press, vol. 94(2), pages 462-480, May.
    50. Leroy, Aurélien, 2014. "Competition and the bank lending channel in Eurozone," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 296-314.
    51. Ravn, Søren Hove, 2016. "Endogenous credit standards and aggregate fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 89-111.
    52. Georgiadis, Georgios, 2014. "Towards an explanation of cross-country asymmetries in monetary transmission," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 66-84.
    53. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Credit cycle; Business cycle; Bank competition; Interacted panel VAR;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:99:y:2019:i:c:p:237-251. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/jbf .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.