Dynamics of EU Countries' Credit Activity After the Great Recession

Abstract

Protracted credit crunch after the 2008-2009 crisis is considered as one of the most significant determinants of a sluggish rise in advanced economies. The credit cycle represents a key element of the business cycle, determining capital accumulation fluctuations. The article analyzes recovery trends of credit activity in the EU, and identifies two groups of countries: those with a slow credit recovery and those with an abnormally long period of credit crunch. One of the significant factors slowing the recovery of credit activity lies in the supply side of credit: the tightening of regulatory requirements for banks (Basel II, Basel II.5, Basel III) has had a negative impact on the loan supply. The paper examines the credit cycle model of European countries. An econometric model of the EU credit cycle is constructed as a vector autoregressive model using panel data. Credit standards are assumed to be an endogenous variable, i.e. dependent on other variables; and the change in the Basel requirements for banks is assumed to be an exogenous shock. The econometric model shows a reduction in credit and economic activity due to credit standards tightening for all countries, as well as the formation of credit standards based on macroeconomic variables, primarily depending on the interest rate. The article does not consider the optimal balance between reducing the banking crisis probability and curbing economic growth.