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Credit crunch? An empirical test of cyclical credit policy

  • Herrala, Risto

    ()

    (Bank of Finland Research)

In this paper we test the hypothesis that credit policies are pro-cyclical. Our approach is based on a stochastic frontier analysis of borrower data, as in Chen and Wang (2008). We extend the applicability of the approach, and propose a novel test specification which is informative of many types of pro-cyclicality. The analysis of representative samples of household borrowers during a huge cycle and its aftermath yields evidence of time-varying credit policy. We find that the focus of credit policy changed from collateral to current income during the cycle. Instead of a credit crunch, ie, an overall tightening of credit during the economic and financial contraction, we find a tightening of credit limits with respect to a minority of borrowers and an easing for the majority. In the course of the post-crisis period, credit policy became more lenient. Both the level of credit limits and the ‘tailoring’ of limits to group-specific characteristics of households increased. A reduction in the idiosyncratic variance of limits suggest that banks have become more consistent in their credit policies.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0910netti.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 10/2009.

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Length: 27 pages
Date of creation: 24 Mar 2009
Date of revision:
Handle: RePEc:hhs:bofrdp:2009_010
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Is the 2007 US Sub-prime Financial Crisis So Different? An International Historical Comparison," American Economic Review, American Economic Association, vol. 98(2), pages 339-44, May.
  2. Martin Ruckes, 2004. "Bank Competition and Credit Standards," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 1073-1102.
  3. Goodfriend, Marvin & McCallum, Bennett T., 2007. "Banking and interest rates in monetary policy analysis: A quantitative exploration," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1480-1507, July.
  4. Holmström, Bengt & Tirole, Jean, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," IDEI Working Papers 40, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. DellAriccia, Giovanni & Marquez, Robert, 2005. "Lending Booms and Lending Standards," CEPR Discussion Papers 5095, C.E.P.R. Discussion Papers.
  6. Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
  7. Stefano NERI & Luca SESSA & Federico SIGNORETTI & Andrea GERALI, 2009. "Credit and Banking in a DSGE model," 2009 Meeting Papers 586, Society for Economic Dynamics.
  8. Berger, Allen N. & Udell, Gregory F., 2004. "The institutional memory hypothesis and the procyclicality of bank lending behavior," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 458-495, October.
  9. Herrala, Risto & Kauko, Karlo, 2007. "Household loan loss risk in Finland – estimations and simulations with micro data," Research Discussion Papers 5/2007, Bank of Finland.
  10. Rajan, Raghuram G, 1994. "Why Bank Credit Policies Fluctuate: A Theory and Some Evidence," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 399-441, May.
  11. Honkapohja, Seppo, 2009. "The 1990’s financial crises in Nordic countries," Research Discussion Papers 5/2009, Bank of Finland.
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