Lending standards, productivity, and credit crunches

We propose a macroeconomic model in which adverse selection in investment amplifies macroeconomic fluctuations, in line with the prominent role played by the credit crunch during the financial crisis. Endogenous lending standards emerge due to an informational asymmetry between borrowers and lenders about the riskiness of borrowers. By using loan approval probability as a screening device, banks ration credit following increases in lending risk, generating large endogenous movements in TFP, explaining why productivity often falls during crises. Furthermore, the mechanism implies that financial instability is heightened when interest rates are low.

A Study of Nonbanking Financial Companies in India

In late 2018, the default by a major nonbanking financial company (NBFC) in India led to a credit crunch in the Indian economy. This paper analyzes the evolution of the NBFC sector in India and the sector’s role in extending credit, and it discusses the factors contributing to the 2018 crisis. The paper attempts to understand the advantages and disadvantages of the business model of NBFCs, and the drivers of their rapid rise and subsequent challenges. The paper also briefly discusses the potential impact of the coronavirus disease (COVID-19) pandemic on the NBFC sector.

THE CREDIT GROWTH AND ECONOMIC ACTIVITY IN BOSNIA AND HERZEGOVINA

We have analyzed the impact of credit growth on economic activity in period before, during, and after credit crunch in Bosnia and Herzegovina i.e. from Q12007 to Q42012. In this period, credit growth on average proved itself as a good signal of economic contraction and economic slowdown. This is the first time that interdependence between credits and GDP in Bosnia and Herzegovina was established trough the receiver operating characteristic methodology and trough receiver-operating characteristic. The main research finding shows that level of credit growth is a good signal of substantial decrease of economic activity in case when credit growth was previously very high. The regulators and banking supervision should not allow excessive growth, because during and after credit crunch contraction of economic activity can happen even when credit growth rate is relatively high. This research is one of the first steps in creating early warning system for Bosnian economy by using banking sector data and national accounts data.

Credit constraints and structure: a theoretical model of extractivism and slow-growth dynamics

ABSTRACT We develop a theoretical model that explains the relationship between credit constraints and economic growth in the context of a three-sector economy, including an “extractive” sector. The model belongs in the structuralist tradition and it is inspired by the Colombian economy. In contrast to neoclassic development economics models, we prove that: 1) relaxing the credit crunch would foster formal sector growth but it may nevertheless not imply formal employment growth; and 2) the economy can converge to a pattern where the extractive sector increases while the formal one shrinks.

Housing market will be an election issue in Canada

Significance A collapse in the housing market, which would hit indebted Canadians hard and contribute to a credit crunch that impacts the wider economy, remains unlikely but record house prices and the lack of affordable homes will be issues in the upcoming election. Impacts Consistently high house prices may see young and low-income households give up the idea of home ownership altogether. The prolonged failure of government to ensure more affordable housing will mean widening disparities between owners and renters. Housing demand in smaller markets around major cities, boosted by the pandemic, will cool with a return to office working.

How Does Capital Account Liberalization Affect Systemic Financial Risks? Evidence from China

Capital account liberalization typically results in higher volumes of capital inflows and outflows for a country, yet abnormal cross-border capital flows may lead to overall financial risk accumulation, in turn causing tremendous damages to the economy. Using a time-varying parameter structural vector autoregression model with stochastic volatility (SV-TVP-SVAR), we identify time-varying effects of capital account liberalization on four types of systemic financial risks in China. Empirical results demonstrate that capital account liberalization, in the short run, can effectively curb the accumulation of macroeconomic and sudden stop risks. On the other hand, capital account liberalization may heighten credit crunch and asset bubble risks to varying degrees. We also find that some important capital account liberalization measures are double-edged: reform policies are likely to increase macroeconomic risk when optimizing the financing structure and reducing credit crunch risk.

Schumpeter’s creative destruction and the credit crunch of 2007–2008: an Islamic banking perspective

Purpose This paper aims to compare products traded in secular and Islamic banking environments prior to the credit crunch of 2007–2008; to locate the comparison in a Schumpeterian model of creative destruction of dynamic innovation in the capital markets; and to evaluate the implications for diversity of investor product choice. Design/methodology/approach Financial products are critiqued using qualitative criteria, including underestimation of risk implicit in mortgage-backed securities and securitisation, excessive speculative activity in credit default swaps and the magnification of leverage and volatility. Comparable Islamic products are considered for the extent to which they facilitate the same precursors of market crises. Findings Innovation in secular financial markets has traditionally led to asset bubbles, underestimation of risks and market exuberance. Islamic banking constrains creativity by prohibiting risk transference and disconnection of financing activity from social context and economic purpose. As such, the latter reduces Schumpeterian creative destruction but at the cost of reduced investor choice and market liquidity. Restriction of the reallocation of risk between those who do not wish to hold it and those who do dampens innovation but would have prevented the trading of products which contributed to the credit crunch. Originality/value The constraining effect of Islamic banking upon creativity and innovation is considered alongside its capacity to reduce market volatility, speculation and systemic instability. Schumpeterian theory deepens the analysis in terms of the drivers of innovation and market collapse.

Capital requirements, institutional quality and credit crunch in the MENA region

PurposeThe introduction of Basel capital adequacy standards (I, II and III) has provoked a large body of empirical and theoretical literature that aimed to detect the consequences of risk-based capital rules on bank lending behaviour and credit availability (and the possible emergence of the credit crunch phenomenon), and came up with divergent conclusions. This study aims at participating in this continuous debate but detecting the applicability of the credit crunch theory in the MENA region, taking into consideration the impact of the institutional environment, which may play a role in mitigating the supply-side credit crunch.Design/methodology/approachThis study exploits the Fixed Effects method on a dataset of 210 banks from 14 MENA countries over the period 1999–2016. The paper exploits the percentage change in bank credit as a dependent variable, capital requirements and three institutional quality variables as explanatory variables, in addition to a set of micro- and macro-economic variables.FindingsThe study finds that the implementation of higher capitalisation ratios does participate in a significant decline in bank credit supply. Additionally, by testing the impact of institutional factors on bank lending, it reveals that good governance and political stability encourage banks to extend credit and soften the credit crunch, while higher level of financial freedom discourages banks from expanding loan supply and even magnifies the decline of credit following tightening capital requirements.Practical implicationsThis paper provides very important insight for MENA policymakers and bank regulators by highlighting the importance of the institutional environment factors in amplifying or softening the effect of higher capital requirements in their economies.Originality/valueIn addition to examining an understudied sample of countries, this paper's originality and value added are represented mainly by testing the impact of institutional environment and governance level on bank lending behaviour.