Lending Standards Over the Credit Cycle

56 Pages Posted: 7 Dec 2015

See all articles by Giacomo Rodano

Giacomo Rodano

Bank of Italy

Nicolas Andre Benigno Serrano-Velarde

Bocconi University

Emanuele Tarantino

University of Mannheim - Department of Economics; Tilburg Law and Economics Center (TILEC)

Date Written: October 30, 2015

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.

Keywords: Credit Cycles, Financial Contracts, Credit Rationing, Real Activity.

JEL Classification: E32, E44, G21.

Suggested Citation

Rodano, Giacomo and Serrano-Velarde, Nicolas Andre Benigno and Tarantino, Emanuele, Lending Standards Over the Credit Cycle (October 30, 2015). Available at SSRN: https://ssrn.com/abstract=2699553 or http://dx.doi.org/10.2139/ssrn.2699553

Giacomo Rodano

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Emanuele Tarantino

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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