New Evidence About The Relation Between Credit Availability And Investments Contraction During Systemic Banking Crises

Abstract

Economic literature has revealed the existence of some biases in the identification of the linkage between the supply of credit and aggregate output in periods of financial turbulence. From this perspective, when a banking crisis occurs a contraction of credit offered by banks generally happens, accompanied by a slowdown in economic activity. In these circumstances, there are different directions of causality that explain the coexistence of these two fundamental phenomena, the credit contraction and the economic slowdown. Throughout the analysis of 76 episodes of systemic banking crises, we research for the main determinants and effects which interested with different intensity 54 countries, in terms of credit restriction and economic slowdown. Evidence obtained from the analysis, by considering different components of demand and supply of credit during financial crises, lead us to significant findings, supporting the hypothesis that, under specific circumstances, credit contraction during financial crises is more to be ascribed to the reduction of credit demand from household and enterprises, rather than to a voluntary reduction of credit from banks.