Lending Standards over the Credit Cycle

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.

Monetary Policy at Work: Security and Credit Application Registers Evidence

“…Note that in column 3, as a robustness check, we exclude firms with very high or very low z-score to test whether results hold around the z-score values which sort firms into safer and riskier, as identified by the literature (Rodano, Serrano-Velarde, Tarantino 2015), 40 and we find that this is the case, indeed. Regarding economic effects, following an increase in one standard deviation in the unconventional monetary policy variable, banks with low capital (25 percentile) have a 0.81 percentage points lower probability of granting a loan application than banks with high capital (75 percentile) to the same firm in the same period, which corresponds to a semi-elasticity of 3.11 per cent.…”

The Impact of the ECB’s Targeted Long-Term Refinancing Operations on Banks’ Lending Policies: The Role of Competition

“…Eligible loans were loans to the euro area non-financial 8 This does not mean that the evolution of credit standards cannot be studied using hard data. See, for instance, Rodano et al (2017). 9 Press release: https://www.ecb.europa.eu/press/pr/date/2014/html/pr140605_2.en.html 10 Press release: https://www.ecb.europa.eu/press/pr/date/2016/html/pr160310_1.en.html ECB Working Paper Series No 2364 / January 2020 private sector, excluding loans to households for house purchase.…”

Coase Lecture ‐ The Inverted‐U Relationship Between Credit Access and Productivity Growth

“…Coefficients are plotted in Figure A3 of the and are in line with Rodano et al . () who show that credit rating affects credit constraints mostly during the downturns.…”