Research Discussion Papers, Bank of Finland
No 10/2009:
Credit crunch? An empirical test of cyclical credit policy
Risto Herrala ()
Abstract: 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.
Keywords: credit policy; credit constraints; household borrowing; frontier analysis; (follow links to similar papers)
JEL-Codes: D14; E32; E51; G21; (follow links to similar papers)
27 pages, March 24, 2009
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