Financial Intermediation, Capital Composition and Income Stagnation: The Case of Europe

Abstract

We look into the role of financial intermediation in inducing the European financial crisis of 2008 by exploring the effects of overall lending, and the allocation of credit to specific categories of borrowers, namely households vs. firms. We find that for the EU26 during the period 1995-2008, excessive household leverage through mortgage lending exerted a "crowdingout" effect on availability of credit to support innovation and productive investment. The crowding out effect ultimately translated into a GDP growth that was decoupled from real household income. In this article we explain that shifting credit towards mortgages and away from corporate projects is consistent with rational behaviour based on historical trends aimed at minimizing short-term risk for each individual bank. Nevertheless, as a whole, the sum of individual risk-reducing attitudes generated a long-term systemic risk.

Does mortgage lending impact business credit? Evidence from a new disaggregated bank credit data set

“…This result is line with the findings of Mian et al (2017) for the impact of household debt on real GDP. The medium-run negative effect of mortgage credit growth on GDP growth is also consistent with recent literature on the financegrowth nexus ( Arcand et al, 2015;Bezemer et al, 2016;Samatas et al, 2019 ). In terms of the size of this effect, an increase in mortgage flows on average over the sample by 1.95 pp of GDP decreases GDP growth by -0.39 pp at the trough.…”

“…Moreover, rising household-debt-to income ratios (hence rising debt obligations) depress consumption ( Drehmann et al, 2018 ). The resulting GDP growth decline is consistent with Bezemer et al (2016) and Samatas et al (2019) , who find negative mortgage credit-growth correlations.…”

“…It finds that household credit has negligible growth effects. In contrast, Bezemer et al (2016) and Samatas et al (2019) find negative growth effects.…”

Trade credit in China: Exploring the link between short term debt and payables

“…In fact, small, young and opaque firms typically struggle to access bank finance (Berger and Udell, 2006;Boissay and Gropp, 2007;Howorth and Reber, 2003): when they are young they lack a long and established history that proves that they are successful and they are not able to exploit a consolidated social capital (Ferrary, 2003;Howorth and Moro, 2006). They can even be adversely affected by banking lending strategy because of a misinterpreted level of risk attached to them (Samatas et al, 2019). When firms are more established, they suffer from information asymmetry (Van Caneghem and Van Campenhout, 2012;Wette, 1983) because of their lack of willingness to share information (Lowry et al, 2014;Rheinbaben and Ruckes, 2004) or lack of capability to provide lenders with the information they need (Dell'Ariccia and Marquez, 2004;Moro et al, 2015).…”

When the rainy day is the worst hurricane ever: the effects of governmental policies on SMEs during COVID-19

“…The economic crisis linked to COVID-19 is very different from the last financial crisis (2007–2008) since it does not have a financial origin (bubble-burst cycle); it is the kind of black swan event that took the world economy by complete surprise (Aliber & Kindleberger, 2015 ; Beltratti & Stulz, 2012 ; Fitoussi & Saraceno, 2010 ; McGuinness & Hogan, 2016 ; Samatas et al, 2019 ). Besides, the consequences are dramatic: the USA expects a contraction of nearly 11% in terms of real GDP (Baker et al, 2020 ), with small businesses that are particularly affected since they are typically financially fragile (Bartik et al, 2020 ; Fairlie & Fossen, 2021 ); in the UK, according to a recent McKinsey survey of small and medium enterprises (SMEs), nearly 60% of firms surveyed believe they will be out of business by for April 2021 (Albonico et al, 2020 ).…”