The Relationship Between Credit And Economic Fluctuations

The 2008 financial crisis brought enormous shock to the global real economy. While trying to get over recession, the government and academia think about the reason for the occurrence of the financial crisis. Among all things, the procyclicality of bank credit is widely thought to be one of the most important reasons for the intensification of the crisis. Abundant literature in the western academic circle prove that the bank credit is procyclical through the theoretical and empirical study based on the lending behavior of commercial banks. However, during the financial crisis and the subsequent economic recession, while commercial banks from the major economies suffered from varying degrees of credit growth decreases, Chinese commercial banks enlarged their credit massively. They made more than 10 thousand billion loans from the end of 2008 to 2009 alone. This makes one wonder:is there counter-cyclical effect in the credit behavior in China?This dissertation systematically discusses about the western literature on the topic of credit cyclicality. It categorizes the literature from the angles of credit supply, credit demand and bank regulations. And it identifies that the literature based on Chinses data reached polarized conclusions:While most find Chinese credit procyclical, there are also articles argue that Chinese credit is countercyclical.This dissertation firstly researches on the correlation between credit cycles and economic fluctuations based on the macro economic data between quarter 1 of 2000 and quarter 4 of 2015. It finds that the credit in our country is overall significantly countercyclical. And credit has positive effect on economy. This dissertation then further studies on this topic with VAR model, granger causality test, impulse response model and variance decomposition. And it finds that credit cycles and economic fluctuations granger cause each other; the impulse response of credit to economic fluctuations is negative while that of economic fluctuations to credit is positive.This dissertation then uses the sample of 27 representative Chinese commercial banks during 2000 and 2015 to study the relationship of bank credit and economic fluctuations in the micro level with panel fixed effect models. And it reaches the conclusion that bank credit is overall counter cyclical; the counter cyclicality is even stronger during the economic downturn. In other words, there is time period asymmetry in credit cyclicality in China. However this result is not significant in robustness check. Moreover, although the credit of Chinese commercial banks is still countercyclical during crisis, the crisis weakened the sensitivity of the relationship between credit cycles and economic fluctuations. Besides, this dissertation groups the sample banks differently and finds that the degree of counter cyclicality of bank credit bank differs by different types of banks.Finally, according to the empirical results, this dissertation proposes that the bank regulations policies should be in accordance with the specific circumstances of our banks: the countercyclical regulations which derived from the general fact of procyclical bank credit in the western world should be used more prudently and flexibly in our country since the credit behavior of Chinese banks is generally countercyclical already. The central bank, bank regulator and the government should take special care in their cooperation, to avoid the conflict or repetition of their policies. For the commercial banks, they should increase the quality of their credit counter cyclicality, optimize their loan structure, support industries and enterprises with potentials and timely withdraw from industries that have overcapacity; strengthen risk management and secure capital adequacy and loan loss provisions; and lay emphasis on making and promoting new financial services and products in order to alleviate their dependence on loan profit.