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Credit cycles, credit risk, and prudential regulation

  • Gabriel Jiménez

    ()

    (Banco de España)

  • Jesús Saurina

    ()

    (Banco de España)

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 terms during boom periods, both in terms of screening of borrowers and in collateral requirements. Therefore, we confirm the predictions from theoretical models based on disaster myopia, herd behaviour institutional memory and agency problems between banks' managers and shareholders regarding the incentives of the former to engage in too expansionary credit policies during lending booms. The paper also develops a prudential tool, based on loan loss provisions, for banking regulators in order to cope with the former problem.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/05/Fic/dt0531e.pdf
File Function: First version, October 2005
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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 0531.

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Length: 34 pages
Date of creation: Oct 2005
Date of revision:
Handle: RePEc:bde:wpaper:0531
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Web page: http://www.bde.es/bde/en/secciones/informes/Publicaciones_se/docs/
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