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Lending Standards Over the Credit Cycle

Giacomo Rodano, Nicolas Serrano-Velarde () and Emanuele Tarantino

No 563, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: We empirically identify the lending standards applied by banks to small and medium firms over the cycle. We exploit an institutional feature of the Italian credit market that generates a sharp discontinuity in the allocation of comparable firms into credit risk categories. Using loan-level data, we show that during the expansionary phase of the cycle, banks relax lending standards by narrowing the interest rate spreads between substandard and performing firms. During the contractionary phase of the cycle, the abrupt tightening of lending standards leads to the exclusion of substandard firms from credit. These firms then report significantly lower production, investment, and employment. Finally, we find that the drying up of the interbank market is an important factor determining the change in bank lending standards. JEL classification: E32, E44, G21. Keywords: Credit Cycles; Financial Contracts; Credit Rationing; Real Activity.

Date: 2015
New Economics Papers: this item is included in nep-ban and nep-mac
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Journal Article: Lending Standards over the Credit Cycle (2018) Downloads
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