Cross Country Heterogeneity of Procyclicality of Bank Loans: Evidence from OECD Countries using the SURE Model
Cross Country Heterogeneity of Procyclicality of Bank Loans: Evidence from OECD Countries using the SURE Model

Summary/Abstract: Procyclicality of credit supply, which refers to the simultaneous movement of credit issuedto the non-fi nancial sector alongside economic activity indicators, can create a destabilizingfeedback loop between the banking system and the real economy. The impact of credit supply onthe fi nancial and real sectors may vary across different economies, and the interconnectednessbetween countries can magnify the effect.We conducted research examining procyclicality of loans provided by banks, analyzing dataat the country level for 13 OECD countries for over 16 years (2005–2020). Our research fi ndingsindicate that the parameters measuring the procyclical effect are statistically insignifi cant whenusing the FE panel model. To showcase diversity of relationships under scrutiny across countries,we employed an OLS regression approach to estimate procyclicality for each country’s loans.This approach assumes a lack of interconnectedness between economies.We then introduced the Seemingly Unrelated Regression Equations (SURE) framework toexamine how interconnectedness among countries affects the strength of loan procyclicality. Ouranalysis reveals the existence of procyclicality in many countries, and utilizing the SURE modelfurther reinforces the phenomenon. Moreover, we found that bank-specifi c variables are moresignifi cant as loan supply determinants than macroeconomic variables.

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