The Association between Bank Credit Terms and Conditions and the Business Cycle in the Euro-Area

Abstract

We explore the trajectory of bank loan Terms and Conditions over the business cycle, where the latter is decomposed into its long-run (trend) and short-run (cyclical) components. We find that deterioration of each business cycle component leads to a significant tightening of credit terms and conditions. We found mixed results concerning the symmetry of impacts of the short and long run components. Symmetry was found between the terms and conditions on loans for small vs. large enterprises. Our findings provide very useful information to policy makers and thus they should be taken into consideration when monetary policies are designed.

Keywords: Credit Terms and Conditions; Business Cycle; Bank Lending Survey

JEL Classification: E30, E32, E44, G21