Ex - Post Risk and the Cyclicality of Banks’ Self - Discipline: Evidence from the USA banks

Bank firms try to improve their efficiency by offering credit to large firms which extent trade credit to those firms that are blocked from bank credit or faces high possibilities to not pay back their loans. This self-discipline helps banks to become more prudent when they lend risky firms such as small and medium size firms. So, the aim of this research is to empirically examine if both credit cycle of large lending and business cycle affect the ex-post credit risk (i.e. non-performing loans) in the banking system of USA. A unique data set is created by using the Statistics on Depository Institutions report compiled by the Federal Deposit Insurance Corporation covering the period between 2010Q1-2019Q4. The Credit Crunch of 2007 had its origin in US real estate market, but rapidly it is expanded worldwide because of banking system interconnection across countries. A crucial characteristic of the aforementioned crises was the defaults on subprime mortgages because of the lax lending practices and because the period covered by the low starter interest rate ended. Therefore, we carry out research on US NPLs considering a very important banking system for the global economy taking into account the pressure on south part pf Eurozone because of the Credit Crunch of 2007 as well as for the robustness of many European banks because of the interconnection of banks across counties. What we found, using the GMM as econometric methodology, is that both current credit cycle of large lending and current business cycle can influence negatively the US NPLs due to the self-discipline role of large lending and the adverse macroeconomic conditions respectively. In addition, we found that the credit cycle of large lending it can be associated positively with US NPLs with one period lag supporting the excess credit influence on NPLs. Moreover, we noticed that the US NPLs have not a symmetric sensitivity between both business cycle and credit cycle of large lending. Finally, the empirical result of our research can help policy makers as well as bankers to their effort to develop a more stable banking system when they design policies to deal effectively with NPLs.