The intertwining of credit and banking fragility

Jerome Creel, Paul Hubert and Fabien Labondance

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Abstract: Although the literature has provided evidence of the predictive power of credit for financial and banking crises, this article aims to investigate the grounds of this link by assessing the interrelationships between credit and banking fragility. The main identification assumption represents credit and banking fragility as a system of simultaneous joint data generating processes whose error terms are correlated. We test the null hypotheses that credit positively affects banking fragility—a vulnerability effect—and that banking fragility has a negative effect on credit—a trauma effect. We use seemingly unrelated regressions and 3SLS on a panel of European Union (EU) countries from 1998 to 2012 and control for the financial and macroeconomic environment. We find a positive effect of credit on banking fragility in the EU as a whole, in the Eurozone, in the core of the EU but not at its periphery, and a negative effect of banking fragility on credit in all samples.

Keywords: Banking fragility; Credit growth; Nonperforming loans; SUR model (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-mon
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-02894259v1
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Citations: View citations in EconPapers (6)

Published in International Journal of Finance and Economics, 2019, 26 (1), pp.459-475. ⟨10.1002/ijfe.1799⟩

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Related works:
Journal Article: The intertwining of credit and banking fragility (2021)
Working Paper: The intertwining of credit and banking fragility (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02894259

DOI: 10.1002/ijfe.1799

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