Identifying credit procyclicality processes and the impact of statistical provision in Spain: analysis of bank financial statements

Abstract

This paper considers credit procyclicality processes for Spanish deposit institutions using the macro- and micro-prudential methods for the period from 1984 to 2009. The macro-prudential method proposed by Basel III is applied first in order to identify credit cycles and act as a criterion for establishing counter-cyclical capital buffer requirements. Two expansive credit cycles are thus detected, both of which are indeed followed by financial instability problems. In addition, a micro-prudential approach is applied to analyse the effects of the credit policy of banks on the results obtained during each of the two credit cycles. Processes of procyclicality at the level of financial institutions are detected for the first credit cycle, while for the second evidence is presented to support the idea that statistical provision proved effective in the early years of the crisis. These findings are important for designing prudential policies aimed at preventively monitoring and fostering stability in the banking sector.