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Should macroprudential policy target corporate lending? Evidence from credit standards and defaults

Author

Listed:
  • Luis Férnandez Lafuerza

    (Banco de España)

  • Jorge E. Galán

    (Banco de España)

Abstract

We provide compelling evidence of the association between credit standards at loan origination in the corporate sector and default risk, a topic that has received little attention in the literature in comparison to the study of this relationship in the mortgage market. Using data from the Spanish credit register merged with corporate balance sheet information spanning the last financial cycle, we demonstrate that leverage and debt burden ratios at loan origination are key predictors of future corporate loan defaults. We also show that the deterioration in lending standards is strongly correlated to the build-up of cyclical systemic risk during periods of financial expansions. Specifically, limits on the debt-to-assets ratio and the interest coverage ratio could serve as effective tools to mitigate credit risk during economic expansions. We identify that the strength of these associations varies significantly across different sectors and is dependent on firms’ size, age and the existence of prior relationships with the bank. Real estate firms and small and medium-sized enterprises exhibit the strongest relationship between credit standards and future default. Overall, our findings provide strong support for the effectiveness of macroprudential measures targeting the corporate sector and contribute to providing guidance for the implementation of borrower-based measures in key segments of corporate credit.

Suggested Citation

  • Luis Férnandez Lafuerza & Jorge E. Galán, 2024. "Should macroprudential policy target corporate lending? Evidence from credit standards and defaults," Working Papers 2413, Banco de España.
  • Handle: RePEc:bde:wpaper:2413
    DOI: https://doi.org/10.53479/36477
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    File URL: https://www.bde.es/f/webbe/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/24/Files/dt2413e.pdf
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    More about this item

    Keywords

    bank credit; defaults; lending standards; macroprudential policy; non-financial corporations;
    All these keywords.

    JEL classification:

    • 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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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