Determinants of the credit cycle: a flow analysis of the extensive margin

Vincenzo Cuciniello and Nicola di Iasio ()
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Nicola di Iasio: ECB

No 1266, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We use monthly data on individual loans from the Italian Credit Register over the period from 1997 to 2019 and show that bank credit expansions in the non-financial private sector are mostly explained by variations in the extensive margin calculated either in credit flows or 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 states: (i) borrowers, (ii) applicants and (iii) others (neither debtors nor applicants). The paper investigates the macroeconomic dimension of these gross flows and documents three key cyclical facts. First, entries in the credit market by new obligors (`inflows') account for the bulk of volatility in the net creation of borrowers. Second, the volatility of borrower inflows is two times as large as the volatility of obligors exiting the credit market (`outflows'). Third, borrower inflows are highly pro-cyclical, lead 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 theoretical predictions of these models, but search frictions seem to play a major role in shaping movements along the extensive margin.

Keywords: borrower; applicant; gross flows; business cycle; credit cycle (search for similar items in EconPapers)
JEL-codes: E32 E44 E51 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-ban and nep-mac
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Determinants of the credit cycle: a flow analysis of the extensive margin (2021)
Working Paper: Determinants of the credit cycle: a flow analysis of the extensive margin (2020)
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