What Are the Impacts of Credit Crunch on the Bank-Enterprise System? An Analysis Through Dynamic Modeling and an Italian Dataset

Desogus, Marco and Casu, Elisa (2020): What Are the Impacts of Credit Crunch on the Bank-Enterprise System? An Analysis Through Dynamic Modeling and an Italian Dataset. Published in: Applied Mathematical Sciences , Vol. 14, No. 14 (2020): pp. 679-703.

Abstract

There is an intrinsic and mutualistic dependence between the bio-economic performance of banks and that of enterprises. This supposition is supported by correlations identified in a comprehensive analysis of the Italian banking sector, which reveal particularly strong relations between financial intermediaries and smaller enterprises. Concentrating on developments within the bank-enterprise system (and by extension, in households), we discuss the positive effects, including on macroeconomics, generated when the banking sector supplies funding to productive infrastructure to understand how the industry remains healthy and efficient. The negative effects produced by the disappearance of such a cycle are also considered. This paper thus presents a mathematical argument through dynamic modelling to evaluate the structural trends in bank and company populations that result from more and less expansive credit strategies assumed by banks. Empirical observations of this data also reflect the critical stress factor of the (micro)enterprise population that allows it to generate positive economic variations as financial leverage decreases. The ensuing assessment of stable and unstable points of equilibrium as well as bifurcations and their irreversibility (hysteresis) reveals that banks have stagnating profits and increasing numbers of non-performing loans. Finally, we investigate the possibility of an optimal minimum level of credit leverage and how to improve the stabilizing measures that are conferred to the system itself, especially given the uncertainty caused by the COVID-19 pandemic.

• Item Type: MPRA Paper
• Language: English
• Keywords: credit crunch; dynamic modelling; simulation; credit big data; economic systems; financial stability; non-linear analysis
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C61 - Optimization Techniques ; Programming Models ; Dynamic Analysis; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C62 - Existence and Stability Conditions of Equilibrium; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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