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Bank lending to the production sector: credit crunch or extra-credit?

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  • Di Giulio, Daniele

Abstract

This paper provides empirical evidence to support the theory that, in Italy, over the course of the past two years, even though a considerable slowdown in bank lending has been recorded, there has not been a credit crunch. After a first section dedicated to a descriptive analysis of the data, the paper presents an econometric estimation of the production sector’s demand for bank loans. An Error Correction Model (ECM) is used – estimated for the pre-crisis period (1998.Q2 – 2007.Q2) and applied both with the one and two step procedure – which considers lending as a function of the added value of the private sector, of the gross operating margin to nominal added value ratio (a proxy for self-financing) and of the real interest rate applied to loans. To test the robustness of the results obtained in the first specification of the model, we remove the assumption of weak exogeneity of the independent variables of the single equation model and construct a multivariate multi-equation model (VECM). All of the different approaches and methods adopted provided similar results: as expected, the demand for credit increases as real added value increases and decreases as the cost of lending and self-financing increase. The dynamic out-of-sample forecast of the model, relating to the two-year period of economic and financial crisis (2007.Q3 – 2009.Q2), shows that the actual loan stock remained well above the “theoretical” level forecasted on the basis of the functional relationships estimated before the crisis. This delta (which can be defined as “extra-credit”) is interpreted as the outcome of a rightward shift of the credit supply curve, rather than a leftward shift as would have happened in a credit crunch scenario.

Suggested Citation

  • Di Giulio, Daniele, 2009. "Bank lending to the production sector: credit crunch or extra-credit?," MPRA Paper 26824, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:26824
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    File URL: https://mpra.ub.uni-muenchen.de/26824/1/MPRA_paper_26824.pdf
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    References listed on IDEAS

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    1. Johansen, Soren, 1992. "Cointegration in partial systems and the efficiency of single-equation analysis," Journal of Econometrics, Elsevier, vol. 52(3), pages 389-402, June.
    2. Leonardo Gambacorta & Carlotta Rossi, 2010. "Modelling bank lending in the euro area: a nonlinear approach," Applied Financial Economics, Taylor & Francis Journals, vol. 20(14), pages 1099-1112.
    3. Kok, Christoffer & Rossi, Carlotta & Marqués-Ibáñez, David, 2009. "Modelling loans to non-financial corporations in the euro area," Working Paper Series 989, European Central Bank.
    4. Calza, Alessandro & Manrique, Marta & Sousa, Joao, 2006. "Credit in the euro area: An empirical investigation using aggregate data," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(2), pages 211-226, May.
    5. A. Calza & C. Gartner & J. Sousa, 2003. "Modelling the demand for loans to the private sector in the euro area," Applied Economics, Taylor & Francis Journals, vol. 35(1), pages 107-117.
    6. Antonio Bassanetti & Martina Cecioni & Andrea Nobili & Giordano Zevi, 2011. "Le principali recessioni italiane: un confronto retrospettivo," Rivista di Politica Economica, SIPI Spa, issue 3, pages 281-318, JULY-SEPT.
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    Cited by:

    1. International Monetary Fund, 2010. "Italy; 2010 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; Staff Statement; Statement by the Executive Director for Italy," IMF Staff Country Reports 10/157, International Monetary Fund.

    More about this item

    Keywords

    credit crunch; Italian banks; bank lending; production sector; loan demand; error correction model; cointegration;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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