Ellis W. Tallman and Nargis Bharucha
Economic Review, Vol. 85, No. 3, 2000
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There is ongoing debate about how the banking sector's financial condition affects the supply of credit to business and, ultimately, general macroeconomic conditions. The United States does not generate sufficient data to provide satisfactory answers to these questions, given the low frequency of credit cycles. However, the experiences of other developed countries may provide additional insight. This article investigates the 1986–93 credit cycle in Australia. A comparison of key differences and similarities between the U.S. and Australian banking systems allows a useful analysis of the Australian experience as it relates to the general economic issue of supply-based loan contraction.
Australian bank lending between 1986 and 1993 is of particular interest because it was the first credit cycle following financial deregulation in that country. Emerging from a regulated era, Australian banks had limited experience in managing portfolios that included risky commercial loans. During the downswing of the cycle, a decrease in loan growth followed the recognition of loan losses—but was the decrease due to lower borrower demand or at least partially to lower supply? The results suggest that while demand-side factors account for much of the credit cycle, evidence is consistent with the argument that supply-side elements also played a role. The authors conclude that there is a relationship, albeit a relatively weak one, between the loan-loss experience of the early 1990s and subsequent constrained lending behavior.