Credit crunch? An empirical test of cyclical credit policy

Arbeitspapier

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.

Object Details

• Language: Englisch
• ISBN: 978-952-462-503-6

References and Relationships

• Bibliographic citation: Series: Bank of Finland Research Discussion Papers ; No. 10/2009

Classification and Topics

• Classification: Wirtschaft ; Household Saving; Personal Finance ; Business Fluctuations; Cycles ; Money Supply; Credit; Money Multipliers ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Subject: credit policy ; credit constraints ; household borrowing ; frontier analysis

Contributors, Location and Time

• Event: Geistige Schöpfung
• (who): Herrala, Risto
• Event: Veröffentlichung
• (who): Bank of Finland
• (where): Helsinki
• (when): 2009

Further information

• Handle: http://hdl.handle.net/10419/212131
• Last update: 28.03.2025, 11:44 AM CET