Lending standards over the credit cycle

Rodano, Giacomo ; Serrano-Velarde, Nicolas ; Tarantino, Emanuele

URL: https://www.bde.es/f/webpi/SES/seminars/2015/files...
Additional URL: ftp://ftp.igier.unibocconi.it/wp/2015/563.pdf
Document Type: Working paper
Year of publication: 2015
The title of a journal, publication series: Working paper / IGIER - Università Bocconi
Volume: 563
Place of publication: Milano
Related URLs:
Publication language: English
Institution: School of Law and Economics > VWL, Mikroökonomik (Juniorprofessur) (Tarantino 2014-2019)
Subject: 330 Economics
Classification: JEL: E32 , E44 , G21,
Keywords (English): Credit Cycles ; Financial Contracts ; Credit Rationing ; Real Activity
Abstract: We empirically identify the lending standards applied by banks to small and medium firms over the cycle. We exploit an institutional feature of the Italian credit market that generates a sharp discontinuity in the allocation of comparable firms into credit risk categories. Using loan-level data, we show that during the expansionary phase of the cycle, banks relax lending standards by narrowing the interest rate spreads between substandard and performing firms. During the contractionary phase of the cycle, the abrupt tightening of lending standards leads to the exclusion of substandard firms from credit. These firms then report significantly lower production, investment, and employment. Finally, we find that the drying up of the interbank market is an important factor determining the change in bank lending standards.

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