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Competition and credit procyclicality in European banking

Aurélien Leroy and Yannick Lucotte ()

Journal of Banking & Finance, 2019, vol. 99, issue C, 237-251

Abstract: This paper empirically assesses how competition in the banking sector affects credit procyclicality by estimating both an interacted panel VAR model using macroeconomic data and a single-equation model with bank-level data. These two empirical approaches show that a deviation of actual GDP from potential GDP leads to greater credit fluctuations in economies where bank competition is weak. This suggests that increased market power for banks increases the financial accelerator mechanism, which is consistent with recent macroeconomic models showing that monopolistic banking tends to increase macroeconomic volatility by making credit cheaper during booms and more expensive during recessions.

Keywords: Credit cycle; Business cycle; Bank competition; Interacted panel VAR (search for similar items in EconPapers)
JEL-codes: C33 D40 E32 E51 G20 (search for similar items in EconPapers)
Date: 2019
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Related works:
Working Paper: Competition and Credit Procyclicality in European Banking (2019)
Working Paper: Competition and credit procyclicality in European banking (2017) Downloads
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DOI: 10.1016/j.jbankfin.2018.12.004

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