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The intertwining of credit and banking fragility

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  • Jérôme Creel
  • Paul Hubert
  • Fabien Labondance

Abstract

Although the literature has provided evidence of the predictive power of credit for financial and banking crises, this article aims to investigate the grounds of this link by assessing the interrelationships between credit and banking fragility. The main identification assumption represents credit and banking fragility as a system of simultaneous joint data generating processes whose error terms are correlated. We test the null hypotheses that credit positively affects banking fragility—a vulnerability effect—and that banking fragility has a negative effect on credit—a trauma effect. We use seemingly unrelated regressions and 3SLS on a panel of European Union (EU) countries from 1998 to 2012 and control for the financial and macroeconomic environment. We find a positive effect of credit on banking fragility in the EU as a whole, in the Eurozone, in the core of the EU but not at its periphery, and a negative effect of banking fragility on credit in all samples.

Suggested Citation

  • Jérôme Creel & Paul Hubert & Fabien Labondance, 2021. "The intertwining of credit and banking fragility," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 459-475, January.
    • Handle: RePEc:wly:ijfiec:v:26:y:2021:i:1:p:459-475
    DOI: 10.1002/ijfe.1799
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    Cited by:

    1. Jérôme Creel & Paul Hubert & Fabien Labondance, 2023. "Credit, banking fragility, and economic performance," Oxford Economic Papers, Oxford University Press, vol. 75(2), pages 553-573.
    2. Shengquan Wang & Rong Luo, 2024. "Income distribution, financial liberalisations and banking stability: Theory and international evidence," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 2837-2864, July.
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    4. Dimitrios Asteriou & Konstantinos Spanos, 2022. "Credit to private sector, household debt and economic growth: An empirical investigation of EU countries," Economics and Business Letters, Oviedo University Press, vol. 11(4), pages 34-142.
    5. repec:spo:wpmain:info:hdl:2441/2qqgdhhldi83pq6n0hl9nrguki is not listed on IDEAS
    6. Christophe Blot & Jérôme Creel & Paul Hubert, 2019. "Thoughts on a review of the ECB's monetary policy strategy," Working Papers hal-03403251, HAL.

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    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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