Credit crunch in the European Union: Supply and demand-side analysis of microeconomic data

The recent financial crisis revealed the sensitivity of the banking sector to adverse macroeconomic shocks. The ongoing recovery from the financial crisis is strongly determined by the availability of credit to households and non-financial corporations in terms of investment and private consumption. In this paper, we estimate a credit market disequilibrium model in order to establish specific determinants of credit supply and credit demand and to identify potential credit market disequilibria in 13 countries of the European Union. We differentiate between Eurozone and non-Eurozone economies. Past studies identified credit market disequilibrium mostly on firm-level (mainly single country studies) and aggregated data. In our approach, we merge firm-level data from the Amadeus Bureau Van Dijk database with bank–level data from Bancscope database for the period 2005-2014, which is a significant contribution to the literature. Our unique dataset includes over 290,000 firm-banking relationships, which allows us to estimate credit rationing on the microeconomic data. We consequently add macroeconomic factors (GDP, exchange rate risk, TBILL rate, inflation, central bank assets, policy interest rate),  into the models of credit supply and credit demand. The credit supply and credit demand equations are estimated employing maximum likelihood estimation methods developed by Maddala and Nelson (1974) and Laffont and Garcia (1977), but we adjust the methodology for the analysis of panel data. Our first estimations show periods of credit crunch in most EU countries during and after the financial crisis. We find differences between Eurozone and non-Eurozone economies and also during the pre-crisis, crisis, and the recovery periods.