Banking and the Determinants of Credit Crunches
2011 (English)Report (Other academic)
Why do banks suddenly tighten the criteria needed for credit? Creditcrunches are often explained by the implementation of new regulatoryrules or by sudden drops in firm quality. We present a novel model ofan artificial credit market and show that crunches have a tendency tooccur even if firm quality remains constant, as well as when there areno new regulatory rules stipulating lenders capital requirements. Wefind evidence in line with the asset deterioration hypothesis and resultsthat emphasise the importance of accurate firm quality estimates. Inaddition, we find that an increase in the debts’ time to maturity reducesthe probability of a credit crunch and that a conservative lendingapproach is intrinsically related to the onset of crunches. Thus, ourresults suggest some up till now partially overlooked components contributingto the financial stability of an economy.
Place, publisher, year, edition, pages
Umeå: Institutionen för nationalekonomi, Umeå universitet , 2011. , 23 p.
Umeå economic studies, ISSN 0348-1018 ; 822
lending, screening, agent based model, financial stability
Research subject Economics
IdentifiersURN: urn:nbn:se:umu:diva-45132Local ID: 822OAI: oai:DiVA.org:umu-45132DiVA: diva2:426151