Academic journal article Asian Social Science

The Curse of the Credit Cycle: A Theoretical Review of Potential Cures

Academic journal article Asian Social Science

The Curse of the Credit Cycle: A Theoretical Review of Potential Cures

Article excerpt

Abstract

In this article, we set ourselves the task of explaining the phenomenon of the credit cycle's resilience. Some studies show that credit cyclicity is stable, at least during the last 160 years. At the same time, most of the instruments and measures used for curbing the cycle do not bring tangible and visible results. In this regard, we have set the task of systematizing the existing studies on the issue. In particular, in this paper we've analysed the potential effectiveness of various measures in the abolition of or mitigating the credit cycle. These included a change in capital requirements of commercial banks, the evolution of credit risk evaluation methods, changes in the targets of monetary policy, a degree of institutional development of the economy, a level of competitive pressure on the credit market, targets for non-performing loans, credit rationing policies. As a result of the carried out comparative theoretical research, we came to conclusion that none of the above mentioned tools is an effective medicine, which can cure the credit market from the cyclical pattern of its existence. However, the experience of Asian region, in particular the use of directed credit distribution and establishing targets on non-performing loans and loan losses significantly reduces an amplitude of the cycle, however, at the price of higher credit rationing levels.

Keywords: credit cycle, credit risk, credit market, credit rationing, monetary policy, bank capital, Basel, corruption

1. Introduction

Credit cyclicity along with the phenomenon of the business cycle holds the title of one of the main puzzles of the economic realm. Sustainable alternation of the periods of rise and fall in credit dynamics is a significant problem standing in the way of achieving stable development of the credit market. It is widely believed that the oscillations in credit activity are the result of credit market imperfections. The central place in the explanation of this phenomenon is often given either to interaction of bounded rationality and information asymmetry in the process of changing multiple equilibria in the credit market (Stiglitz & Weiss, 1981; Rötheli, 2012; Burakov, 2013) or, in the framework of the shock approach, to financial accelerator and uncertainty of economic conditions (Bernanke, Gertler, & Gilchrist, 1996; Marti, 1996; Kiyotaki-Moore, 1997). However, regardless of the approach to determining the nature of the credit cycle, resilience of its existence leaves no doubt today. Unfortunately, only a limited number of studies upon the history of credit cycles exist. (Kindleberger, 1975; Haldane, 2010) They show that, regardless of changes in the amplitude of fluctuations in credit, the duration of the cycle and the type of the shock, leading to changes in phases, this phenomenon is a stably recurrent one, at least during the last 160 years (Haldane, 2010). Various attempts to eliminate it, to curb or mitigate, one way or another, are based on a certain theoretical foundation. It is this foundation that serves as a necessary basis for the conduct of a specific monetary policy framework and for the formation of preferences for using one instrument in relation to other. The same logic holds true for the research community, which develops the necessary theoretical background for the use of these tools. However, given the diversity of approaches to the definition of fundamental theoretical principles of the credit cycle, the spread of the proposed measures is truly astonishing. Today, to achieve stability in the credit market absolutely contradictory measures are offered: from the return to the gold standard and abolishment of the fractional reserve banking system to switching monetary regimes in favor of credit targeting (Akerlof & Shiller, 2009). Such fragmentation of the points of view, in our opinion, is a consequence of the above described problem of methodological pluralism. Complex researches summarizing different points of view in the modern literature, unfortunately, don't exist, due to just recent resurgence of interest in the issue of credit cyclicity. …

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