No. 670 - Credit risk and business cycle over different regimes

In the recent banking literature on the relationship between credit risk and the business cycle, the presence of asymmetric effects both across credit risk regimes and through the business cycle has been generally neglected. Employing threshold regression models both at the aggregate and the bank level and exploiting a unique dataset on Italian bank borrowers' default rates, this paper analyzes whether this relationship is characterized by regime switches and thus by asymmetries, determining the thresholds endogenously. Our results show that not only are the effects of the business cycle on credit risk more pronounced during downturns but also when credit risk conditions are poor.