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What Are the Impacts of Credit Crunch on the Bank-Enterprise System? An Analysis Through Dynamic Modeling and an Italian Dataset

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  • Desogus, Marco
  • Casu, Elisa

Abstract

There is an intrinsic and mutualistic dependence between the bio-economic performance of banks and that of enterprises. This supposition is supported by correlations identified in a comprehensive analysis of the Italian banking sector, which reveal particularly strong relations between financial intermediaries and smaller enterprises. Concentrating on developments within the bank-enterprise system (and by extension, in households), we discuss the positive effects, including on macroeconomics, generated when the banking sector supplies funding to productive infrastructure to understand how the industry remains healthy and efficient. The negative effects produced by the disappearance of such a cycle are also considered. This paper thus presents a mathematical argument through dynamic modelling to evaluate the structural trends in bank and company populations that result from more and less expansive credit strategies assumed by banks. Empirical observations of this data also reflect the critical stress factor of the (micro)enterprise population that allows it to generate positive economic variations as financial leverage decreases. The ensuing assessment of stable and unstable points of equilibrium as well as bifurcations and their irreversibility (hysteresis) reveals that banks have stagnating profits and increasing numbers of non-performing loans. Finally, we investigate the possibility of an optimal minimum level of credit leverage and how to improve the stabilizing measures that are conferred to the system itself, especially given the uncertainty caused by the COVID-19 pandemic.

Suggested Citation

  • Desogus, Marco & Casu, Elisa, 2020. "What Are the Impacts of Credit Crunch on the Bank-Enterprise System? An Analysis Through Dynamic Modeling and an Italian Dataset," MPRA Paper 114349, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:114349
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    References listed on IDEAS

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    1. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1996. "The Financial Accelerator and the Flight to Quality," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 1-15, February.
    2. Petrosky-Nadeau, Nicolas, 2013. "TFP during a credit crunch," Journal of Economic Theory, Elsevier, vol. 148(3), pages 1150-1178.
    3. Fong, H Gifford & Vasicek, Oldrich A, 1984. "A Risk Minimizing Strategy for Portfolio Immunization," Journal of Finance, American Finance Association, vol. 39(5), pages 1541-1546, December.
    4. Desogus, Marco & Venturi, Beatrice, 2019. "Bank Crashes and Micro Enterprise Loans," MPRA Paper 114469, University Library of Munich, Germany.
    5. Francisco Buera & Roberto Fattal-Jaef & Yongseok Shin, 2015. "Anatomy of a Credit Crunch: From Capital to Labor Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(1), pages 101-117, January.
    6. Iyer, Rajkamal & Da-Rocha-Lopes, Samuel & Peydró, José-Luis & Schoar, Antoinette, 2014. "Interbank Liquidity Crunch and the Firm Credit Crunch: Evidence from the 2007-2009 Crisis," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 27(1), pages 347-372.
    7. Desogus, Marco & Casu, Elisa, 2020. "A Contribution on Relationship Banking. Economic, Anthropological and Mathematical Reasoning, Empirical Evidence from Italy," MPRA Paper 114365, University Library of Munich, Germany.
    8. Cross, Rod, 1993. "On the Foundations of Hysteresis in Economic Systems," Economics and Philosophy, Cambridge University Press, vol. 9(1), pages 53-74, April.
    9. Gert Wehinger, 2014. "SMEs and the credit crunch: Current financing difficulties, policy measures and a review of literature," OECD Journal: Financial Market Trends, OECD Publishing, vol. 2013(2), pages 115-148.
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    Cited by:

    1. Marco Desogus & Beatrice Venturi, 2023. "Stability and Bifurcations in Banks and Small Enterprises—A Three-Dimensional Continuous-Time Dynamical System," JRFM, MDPI, vol. 16(3), pages 1-20, March.
    2. Desogus, Marco & Casu, Elisa, 2021. "Economic System Entanglement on Intra-Firm Trade Portfolios: The Impact of Counterparty Credit Ratings on Business-to-Business Credit Dynamics," MPRA Paper 114364, University Library of Munich, Germany.

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    More about this item

    Keywords

    credit crunch; dynamic modelling; simulation; credit big data; economic systems; financial stability; non-linear analysis;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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