What are the impacts of credit crunch on the bank-enterprise system? An analysis through dynamic modeling and an Italian dataset

Abstract

There is an intrinsic and mutualistic dependence between the bio-economic performance of banks and that of enterprises. This supposition is supported by correlations identified in a comprehensive analysis of the Italian banking sector, which reveal particularly strong relations between financial intermediaries and smaller enterprises. Concentrating on developments within the bank-enterprise system (and by extension, in households), we discuss the positive effects, including on macroeconomics, generated when the banking sector supplies funding to productive infrastructure to understand how the industry remains healthy and efficient. The negative effects produced by the disappearance of such a cycle are also considered. This paper thus presents a mathematical argument through dynamic modelling to evaluate the structural trends in bank and company populations that result from more and less expansive credit strategies assumed by banks. Empirical observations of this data also reflect the critical stress factor of the (micro)enterprise population that allows it to generate positive economic variations as financial leverage decreases. The ensuing assessment of stable and unstable points of equilibrium as well as bifurcations and their irreversibility (hysteresis) reveals that banks have stagnating profits and increasing numbers of non-performing loans. Finally, we investigate the possibility of an optimal minimum level of credit leverage and how to improve the stabilizing measures that are conferred to the system itself, especially given the uncertainty caused by the COVID-19 pandemic.

Stability and Bifurcations in Banks and Small Enterprises—A Three-Dimensional Continuous-Time Dynamical System

“…Drawing on Bischi and Tramontana (2010) for the discrete application of similar dynamical systems and on earlier two-dimensional modeling of the bank-enterprise system by Desogus and Casu (2020b), we have developed a three-dimensional continuous-time Lotka-Volterra dynamical model that demonstrates the interactions between populations of banks and enterprises and the government in a given financial system. Specifically, we focused on those interactions that are facilitated by credit transactions and the role of the guarantee fund in supporting the continuation of credit exchanges during periods of economic crisis.…”

“…In this work, we improve the analysis of the bank-enterprise two-dynamical system. (see Desogus and Venturi 2019;Desogus and Casu 2020b). Indeed, we have noted the significance of positive effects generated by an efficient banking sector that provides liquidity to the business sector so that the banks themselves are kept healthy and performing (Iyer Rajkamal et al 2014).…”

Economic system entanglement on intra-firm trade portfolios: the impact of counterparty credit ratings on business-to-business credit dynamics

“…23), increased the coverage of the public guarantee to 90%-and, in some cases, 100%on credit lines granted by banks. These exogenous interventions sought to improve the (even though external) creditworthiness of businesses [13], affecting the ability of businesses to obtain financing, as expressed in Figure 4, and moving them toward the measurement of ratings | 0 〉. As shown in Figure 5, this has contributed to the reduction of impaired loans on commercial portfolios: among the phenomena described in the figures just mentioned, there is a cause-effect delay of about 30 to 45 days.…”