Credit Cycles, Credit Risk, and Prudential Regulation
by Gabriel Jiménez and Jesús Saurina
Banco de España
This paper finds strong empirical support of a positive, although quite lagged,
relationship between rapid credit growth and loan losses. Moreover, it contains
empirical evidence of more lenient credit standards during boom periods, both
in terms of screening of borrowers and in collateral requirements. We find
robust evidence that during upturns, riskier borrowers get bank loans, while
collateralized loans decrease. We develop a regulatory prudential tool, based
on a countercyclical, or forward-looking, loan loss provision that takes into
account the credit risk profile of banks’ loan portfolios along the business
cycle. Such a provision might contribute to reinforce the soundness and the
stability of banking systems.
JEL Codes: E32, G18, G21.
(PDF, 34 pages 334 kb)