Supply Tightening or Lack of Demand? An Analysis of Credit Developments During the Lehman Brothers and the Sovereign Debt Crises

44 Pages Posted: 15 Mar 2014

Date Written: November 22, 2013

Abstract

We estimate a structural econometric model for the credit market in Italy, using bank-level information and the responses of Italian banks to the euro-area Bank Lending Survey to identify demand and supply, focusing on the recent financial crisis. The main results are the following. First, while in normal circumstances the functioning of the Italian credit market is consistent with a standard imperfect-competition model, during phases of high tension there are credit-rationing phenomena. Second, supply restrictions have a relevant impact on lending, both when they are due to banks’ balance-sheet constraints and when they are the effect of greater perceived borrower riskiness. Third, to a large extent the tightening during the sovereign debt crisis reflected the common shock of the widening sovereign spread, not idiosyncratic bank funding problems. Fourth, the role of supply was stronger during the sovereign than the global financial crisis, mainly due to greater banks’ funding difficulties. In a counterfactual exercise we estimate that in the second quarter of 2012 interest rates were more than 2 percentage points higher and the stock of loans more than 8 percent lower than would have been the case without the tightening of lending standards in the course of the entire crisis.

Keywords: credit rationing, supply tightening, financial crisis, sovereign debt crisis

JEL Classification: E30, E32, E51

Suggested Citation

Del Giovane, Paolo and Nobili, Andrea and Signoretti, Federico Maria, Supply Tightening or Lack of Demand? An Analysis of Credit Developments During the Lehman Brothers and the Sovereign Debt Crises (November 22, 2013). Bank of Italy Temi di Discussione (Working Paper) No. 942, Available at SSRN: https://ssrn.com/abstract=2409009 or http://dx.doi.org/10.2139/ssrn.2409009

Paolo Del Giovane (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Andrea Nobili

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Federico Maria Signoretti

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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