Cyclical Patterns in Profits, Provisioning and Lending of Banks

Jacob Bikker () and H. Hu

DNB Staff Reports (discontinued) from Netherlands Central Bank

Abstract: The proposed risk sensitive minimum requirements of the new Basel capital accord have raised concerns about possible (acceleration of) procyclical behaviour of banking, which might threaten macroeconomic stability. This paper analyses the interaction between business cycles and bank behaviour over the past two decades for 26 industrial countries. As expected, profits appear to move up and down with the business cycle, allowing for accumulation of capital in boom periods. Provisioning for credit losses rise when the cycle falls, but less so when net income of banks is relatively high, which reduces procyclicality. Lending fluctuates with the business cycle too, but appears to be driven by demand rather than by supply factors such as (shortage of) capital, which contradicts the assumptions underlying capital crunch theory. All in all, over the last decades, distortion caused by procyclical behaviour of banks has been limited, banking crises excepted.

Keywords: profits; credit loss provisioning; lending; business cycle; credit crunch; bank lending (search for similar items in EconPapers)
JEL-codes: E32 E51 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2003
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