Determinants of the Credit Cycle: A Flow Analysis of the Extensive Margin

Abstract

We use monthly data from the Italian Credit Register on individual loans over the period from 1997 to 2019 to show that the expansion in bank lending in the non-financial private sector is mostly explained by variations in the extensive margin, calculated either in terms of credit flows or by the headcount of new borrowers. We then build on a flow approach to decompose changes in the net creation of borrowers into gross flows across three statuses: (i) borrowers, (ii) applicants and (iii) others (neither debtors nor applicants). The paper investigates the macroeconomic credit market by looking at the new obligors (inflows), which account for the bulk of volatility in the net creation of borrowers. Second, the volatility of borrower inflows is twice that of obligors exiting the credit market (outflows). Third, borrower inflows are highly procyclical, leading the economic cycle, and their fluctuations are mainly driven by the probability of getting a loan from new banks. We read these results in light of the macrofinance literature on search frictions and on competition with lender-lender informational asymmetries. Overall, our findings support the theoretical predictions of these models, but search frictions seem to play a major role in shaping movements along the extensive margin.