Financial Architecture and Credit Procyclicality in Europe: Empirical Evidence

Mercredi | 2014-10-22
salle C002, 12h-14h

Aurélien LEROY

This paper empirically analyzes the linkages between credit procyclicality and financial architecture in Europe over the time period from 1999 to 2012 using panel VAR model with interaction terms. This framework allows to make response of credit to an real activity shock conditional to the financial structure of the different economies. Based on financial accelerator theory we presume that 4 indicators of country’s financial architecture (bank competition, bank business model, nature of the financial system as well as risk-weighted capital) can mitigate asymmetry information problems and alleviate incentives to risk-taking. Our findings show that bank competition (low concentration), bank-based financial system as well as well capitalized system imply a weaker procyclicality of bank credit, that we consider asan evidence of a higher stability. Results for bank business model are more mixed. The findings suggest that financial structures matter for stability and for business cycle. Since we assume procyclicality as a measure of instability, our contributionis related to the literature analyzing the effects of financial structures on stability. Keywords: Credit cycle, Economic cycle, stability, financial structure, bank competition,Interacted panel VARJEL Codes: C33, E51, E52