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Banking and the Determinants of Credit Crunches
Umeå University, Faculty of Social Sciences, Department of Economics.
2011 (English)Report (Other academic)
Abstract [en]

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.
Series
Umeå economic studies, ISSN 0348-1018 ; 822
Keyword [en]
lending, screening, agent based model, financial stability
National Category
Economics
Research subject
Economics
Identifiers
URN: urn:nbn:se:umu:diva-45132Local ID: 822OAI: oai:DiVA.org:umu-45132DiVA: diva2:426151
Available from: 2011-06-22 Created: 2011-06-22 Last updated: 2011-10-15Bibliographically approved

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CiteExportLink to record
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