Credit cycles & debt restructuring: Refining theoretical flaws

Abstract

In this article we set ourselves the task to determine the place of the debt restructuring process upon various phases of the credit cycle. Given the fact that modern theories of credit cycle do not emit debt restructuring as an essential element of the credit cycle development, using data on the development of the Russian banking sector for the period from 2004 to 2012, we analyze the specifics of debt restructuring in the banks’ activity. In the study we have identified patterns of restructuring processes’ dynamics and correlated them with the phases of the credit cycle. Also as a result of the research we propose and test methods of the restructuring trend’s identification on the example of the Russian banking sector. The hypothesis of the natural rate of restructuring and deviations from it at the different phases of the credit cycle is also stated. In particular, we believe that restructuring is a natural process in credit relations, but in the pre-crisis period of expansion and the phase of the credit crunch, debt restructuring deviates from the threshold values and changes its role of the instrument of maintaining stability on the credit market to become a deterrent to clear the market of bad debts.