Cyclical fluctuations and credit risk management in Italy in the period 2008-2012: a biostatistical approach

From June 2008 to June 2012, Credit risk management in Italy was characterized by frequent and intense quarterly contractions and expansions around the mean of the nominal total credit used by non-financial corporations. Such fluctuations are frequently ascribed to exogenous Basel I procyclical effects on credit flow into the economy and, consequently, Basel III output-based point-in-time Credit/GDP countercyclical buffering. We have tested the opposite null hypotheses that such variation is correlated to actual default rates, and that such correlation is explained by fluctuations of credit supply around a steady state. We have found that, between June 2008 – and June 2012 (n=17), linear regression of credit growth rates on default rates revealed a negative correlation and that credit supply fluctuated steadily around the default rate with a Steady State Parameter SSP=.00245 with χ2=.3747. We conclude that credit risk management in Italy has been effective in parameterising the credit supply variation to default rates within the Basel II operating framework. Basel III prospective countercyclical point- in-time output buffers based on filtered Credit/GDP ratios and dynamic provisioning proposals should take into account this underlying steady state statistics pattern.