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Credit cycles, credit risk, and prudential regulation

Author

Listed:
  • Gabriel Jiménez

    () (Banco de España)

  • Jesús Saurina

    () (Banco de España)

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 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.

Suggested Citation

  • Gabriel Jiménez & Jesús Saurina, 2005. "Credit cycles, credit risk, and prudential regulation," Working Papers 0531, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0531
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    More about this item

    Keywords

    credit risk; lending cycles; loan loss provisions; bank capital; collateral;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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