Should macroprudential policy target corporate lending? Evidence from credit standards and defaults

Luis Férnandez Lafuerza and Jorge Galan
Additional contact information
Luis Férnandez Lafuerza: Banco de España

No 2413, Working Papers from Banco de España

Abstract: We provide compelling evidence of the association between credit standards at loan origination in the corporate sector and default risk, a topic that has received little attention in the literature in comparison to the study of this relationship in the mortgage market. Using data from the Spanish credit register merged with corporate balance sheet information spanning the last financial cycle, we demonstrate that leverage and debt burden ratios at loan origination are key predictors of future corporate loan defaults. We also show that the deterioration in lending standards is strongly correlated to the build-up of cyclical systemic risk during periods of financial expansions. Specifically, limits on the debt-to-assets ratio and the interest coverage ratio could serve as effective tools to mitigate credit risk during economic expansions. We identify that the strength of these associations varies significantly across different sectors and is dependent on firms’ size, age and the existence of prior relationships with the bank. Real estate firms and small and medium-sized enterprises exhibit the strongest relationship between credit standards and future default. Overall, our findings provide strong support for the effectiveness of macroprudential measures targeting the corporate sector and contribute to providing guidance for the implementation of borrower-based measures in key segments of corporate credit.

Keywords: bank credit; defaults; lending standards; macroprudential policy; non-financial corporations (search for similar items in EconPapers)
JEL-codes: C32 E32 E58 G01 G28 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2024-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-eec and nep-rmg
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.bde.es/f/webbe/SES/Secciones/Publicaci ... 24/Files/dt2413e.pdf First version, May 2024 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:2413

DOI: 10.53479/36477

Access Statistics for this paper

More papers in Working Papers from Banco de España Contact information at EDIRC.
Bibliographic data for series maintained by Ángel Rodríguez. Electronic Dissemination of Information Unit. Research Department. Banco de España ().