Does the banking sector structure matter for credit procyclicality?

The aim of this paper is to investigate whether the banking sector structure matters in explaining credit procyclicality for 17 OECD countries over the 1986-2010 period. To this end, we first provide a detailed classification of the banking system structure through the use of a hierarchical clustering methodology. Relying on the estimation of panel VAR models and accounting for potential heterogeneity between countries, we then propose a measure of credit procyclicality based on the impulse-response function of credit to a shock in GDP. Our findings show that while credit significantly responds to shocks in GDP, the structure of the banking sector is not a key factor in assessing the procyclicality of credit for OECD countries.

► The link between the banking sector structure and credit procyclicality is analyzed. ► A hierarchical clustering approach provides a classification of the banking system. ► Panel VAR models are estimated for subgroups of OECD countries. ► The banking sector structure is not a key factor in assessing credit procyclicality.