Aktuelles Stichwort: "Kreditklemme" Interview with Klaus Abberger (in German) 28.10.2010 Media Library of the CESifo Group
The current financial crisis has exerted a strong effect on bank lending to companies in Germany. While the volume of outstanding loans rose at double-digit rates at the end of 2008, it declined sharply over the following year, ending 2009 with a -4.7% drop over the previous year, a historical low. Average interest rates for outstanding loans also fell noticeably, from 5.6% in October 2008 to 3.9% in December 2009. Over the same period, the European Central Bank had reduced the relevant costs for refinancing loans (the so-called main refinancing rate) from 4.25% to 1.0%. This shows that the banks passed barely half of the rate reduction on to their corporate borrowers, triggering a public discussion in Germany on whether the country’s economy is being affected by a “credit crunch”, variously known also as “credit squeeze” or “credit crisis”.
Basically, a credit crunch involves a reduction in the supply of credit to companies. But such a shortfall by itself does not constitute a credit squeeze. Some other conditions must be present, and in defining them the approaches vary. According to the German Bundesbank, for instance, a credit crunch occurs when the banks’ loan supply is so constrained as to pose a significant risk to the economy (see Deutsche Bundesbank, 2009, p. 22). Bernanke and Lown (1991, p. 207) say a credit crunch occurs when credit supply is noticeably restricted, but not when such a restriction stems from a change in the creditworthiness of the borrowers (for instance, if these show a higher risk of default). Sinn (2010, Chapter 10) defines a credit crunch as a situation in which the market interest rate drifts away from the central bank’s interest rate because the banks cannot channel all the liquidity provided by the central bank to the borrowers as a result of having insufficient capital to meet the regulatory capital reserves (a solvency crisis). The banks become the bottleneck in credit supply.
The difficulty in identifying a credit crunch stems from the fact that not every decrease in banks’ lending activity automatically constitutes a credit crunch, since the reason for it, instead of reduced credit supply, could well be a fall in the demand for credit. This is usually the case in an economic downturn, when companies faced with dwindling orders postpone or cancel credit-financed investments.
During the current crisis, two factors led to a credit crunch. First, the interbank market seized up as a result of the loss of mutual trust when Lehman Brothers collapsed in September 2008. The interbank market is where banks trade liquidity with each other in the form of short-term loans (for example overnight money or ninety-day loans). This liquidity is a key component for the refinancing of loans extended to the private economy. Second, the banks suffered high equity capital losses as a result of having to write off toxic assets of US origin. Since the Basel Accords’ equity requirements stipulate that a bank’s equity may not fall below a given ratio of its assets, the banks have had to reduce the volume of their business (for instance by throttling back their lending activity); this is known as “deleveraging”.
In practice, a number of other indicators are often examined to ascertain whether a credit crunch occurs. These indicators are extracted from surveys of banks and companies, such as the German Bundesbank’s Bank Lending Survey, which four times a year polls the credit managers of the main banks regarding their assessment of lending development in the past quarter and its outlook for the coming one. They are asked about changes in their bank’s guidelines for lending to companies and households, as well as estimating the evolution of credit demand. During the current crisis, the share of banks tightening their lending guidelines rose sharply over the average of the previous months.
The Ifo Institute also conducts regular credit-related surveys among companies. The findings are condensed into the so-called Ifo Credit Constraint Indicator and published monthly. Around 4,000 companies in manufacturing, construction, wholesaling and retailing are asked every month regarding their assessment of how restrictive banks’ lending policies are compared to the previous month. The possible replies are “accommodating”, “normal” and “restrictive”. The credit constraint indicator, also known as “credit hurdle”, shows the share of companies that assess lending as restrictive. The findings are published as an overall index and also broken down by sector and company size. The breakdown by company size follows the guidelines set forth by the Commission of the European Union. During the 2009 crisis the hurdle for large companies climbed well above 50%, while for mid-sized and small companies it exceeded 40%.
A more direct indicator of a credit crunch is provided by the Ifo Institute’s definition, which is based on the spread between the central bank’s interest rate and the interest rates charged by banks for the loans they extend. During the crisis, this difference rose to extremes both in the USA and in Europe. Indeed, a large portion of the central bank’s low-interest policy evaporated without a trace as a result of the banks’ huge equity losses.
Bernanke, Ben S. and Cara S. Lown (1991), The Credit Crunch, in: Brookings Papers on Economic Activity, Vol. 1991, Nr. 2, p. 205 – 247.
Deutsche Bundesbank (2009), Die Entwicklung der Kredite an den privaten Sektor in Deutschland während der globalen Finanzkrise, in: Monatsbericht September 2009, p. 17 – 36.
Sinn, Hans-Werner (2010), Casino Capitalism, to be published by: Oxford University Press.
Lists of entries the database DICE on Banking/Credit Market Regulation
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