The Curse of the Credit Cycle: A Theoretical Review of Potential Cures

Abstract

In this article, we set ourselves the task of explaining the phenomenon of the credit cycle's resilience. Some studies show that credit cyclicity is stable, at least during the last 160 years. At the same time, most of the instruments and measures used for curbing the cycle do not bring tangible and visible results. In this regard, we have set the task of systematizing the existing studies on the issue. In particular, in this paper we've analysed the potential effectiveness of various measures in the abolition of or mitigating the credit cycle. These included a change in capital requirements of commercial banks, the evolution of credit risk evaluation methods, changes in the targets of monetary policy, a degree of institutional development of the economy, a level of competitive pressure on the credit market, targets for non-performing loans, credit rationing policies. As a result of the carried out comparative theoretical research, we came to conclusion that none of the above mentioned tools is an effective medicine, which can cure the credit market from the cyclical pattern of its existence. However, the experience of Asian region, in particular the use of directed credit distribution and establishing targets on non-performing loans and loan losses significantly reduces an amplitude of the cycle, however, at the price of higher credit rationing levels.

Credit Cycles & Debt Restructuring: Refining Theoretical Flaws

“…In particular, in the case when the state presence is significant on the market of credit, and the economy is characterized by the principles of extracting rents, banks can begin to fulfill political functions and to refinance debts of quasi-profitable organizations in order to preserve the support of the electorate (e.g., Vernandez-Villaverde et al, 2013;Burakov, 2014e;).…”