Credit demand, supply, and conditions: A tale of three crises

by Sarah Holton, Martina Lawless and Fergal McCann

Vox
March 4, 2012

As the Eurozone crisis continues, lending to the real economy has fallen significantly. But it is difficult to know if this is due to a drop in demand for loans or a drying up of supply. Using data for small- and medium-sized companies in 11 Eurozone countries, this column identifies the effects of the crisis on credit demand, supply, and conditions.

The post-2007 Eurozone economic crisis has taken on a number of forms. Real economic activity has declined, in certain cases significantly. Turmoil in sovereign and financial sectors has seen yields on government bonds and spreads on bank credit-default swaps (CDSs) increase dramatically. The vast credit expansion of the previous decade has led to large private sector debt overhang.

Concurrent with these crises, lending to the private sector has fallen substantially. An ongoing debate centres on whether this decrease has been driven by weak demand on the part of firms, or on the tightening of credit conditions (the often-heard ‘credit crunch’). A number of papers have identified distinct supply- and demand-side channels and shown that, since the onset of the crisis, supply-side problems have contributed to lower aggregate lending (see, for example, Jimenez et al 2012 and Puri et al 2011). A supply-side credit crunch poses a number of concerns for policy makers. Campello et al (2010), for example, show that credit-constrained firms are less likely to expand employment, invest in technology, or spend on marketing.

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