Credit risk management and cyclicality of bank lending to non-financial corporations in Italy during the financial crisis: 2008-2012. A modeling study

Credit to non-financial corporations in Italy is characterized, in the period June 2008-June 2012, by frequent and intense quarterly cyclical fluctuations (peak amplitude €39.2 billion). The amplitude of these fluctuations has been ascribed to the effects of Basel II accords during the financial crisis which, by imposing regulatory capital constraints on banks’ lending on the basis of credit risk estimates, induces an excessive credit reduction during economic recession and an excessive credit growth during economic expansion. In order to mitigate these cyclical effects, various techniques of buffering have been advocated. The authors have tested the opposite null hypothesis that the interaction between new credit given and defaults from outstanding loans tends to a steady state. It has been tested a quasi-linear distribution with a Cyclical Sensitivity Parameter (CSP) parameterized on variation of new credit supply in excess or defect of the rate of default of outstanding loans. It is found that, in the period June 2008-June 2012, frequent fluctuations of the total credit used by non-financial corporations are strongly related to the interaction between the default rate of outstanding loans and the growth rate of new credit supply. It’s concluded that credit risk management in Italy has been effective in parameterizing credit supply growth to outstanding credit reduction caused by defaulting loans within the Basel II regulatory framework. Basel III prospective point-in-time output buffers based on filtered Credit/GDP ratios and dynamic provisioning proposals should take into account this steady state pattern underlying frequent and intense credit cyclical fluctuations.