Macroprudential policy and credit supply cycles

Western Europe and the United States have recently experienced a major banking crisis, followed by a severe economic recession with significant costs in terms of aggregate output and employment. These phenomena are not unique: banking crises are recurrent phenomena, triggering deep and long-lasting recessions. The main channel by which weaknesses in banks’ balance sheets affect the real economy is via a reduction in the supply of credit, i.e. a credit crunch. Importantly, banking crises are not random events that stem from exogenous risks, but arise after periods of very strong private credit growth. Therefore, for systemic risk, it is crucial to understand the determinants and implications of credit in good and bad times – the so-called credit cycles. This paper analyses the relationship between credit cycles and systemic risk and, in particular, whether macroprudential policies affect credit supply cycles (i.e. credit cycles stemming from credit supply rather than demand). Moreover, the author reviews the impact on credit supply from one macroprudential policy: countercyclical bank capital requirements (based on the Spanish dynamic provisioning).