Credit cycles, credit risk, and prudential regulation

Gabriel Jimenez and Jesús Saurina

No 531, Working Papers from Banco de España

Abstract: This paper finds strong empirical support of a positive, although quite lagged, relationship between rapid credit growth and loan losses. Moreover, it contains empirical evidence of more lenient credit terms during boom periods, both in terms of screening of borrowers and in collateral requirements. Therefore, we confirm the predictions from theoretical models based on disaster myopia, herd behaviour institutional memory and agency problems between banks' managers and shareholders regarding the incentives of the former to engage in too expansionary credit policies during lending booms. The paper also develops a prudential tool, based on loan loss provisions, for banking regulators in order to cope with the former problem.

Keywords: credit risk; lending cycles; loan loss provisions; bank capital; collateral (search for similar items in EconPapers)
JEL-codes: E32 G18 G21 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2005-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

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http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... o/05/Fic/dt0531e.pdf First version, October 2005 (application/pdf)

Related works:
Journal Article: Credit Cycles, Credit Risk, and Prudential Regulation (2006)
Working Paper: Credit Cycles, Credit Risk, and Prudential Regulation (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0531

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