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Credit risk management in Italy is characterized, in the period June 2008 toJune 2012, by frequent (frequency=0.5 cycles per year) and intense (peakamplitude: mean=39.2 billion Euros, s.e.=2.83 billion Euros) quarterlycontractions and expansions around the mean (915.4 billion Euros, s.e.=3.59billion Euros) of the nominal total credit used by non-financial corporations.Such frequent and intense fluctuations are frequently ascribed to exogenousBasel II procyclical effects on credit flow into the economy and, consequently,Basel III output based point in time Credit to GDP countercyclical bufferingadvocated. We have tested the opposite null hypotheses that such variation issignificantly correlated to actual default rates, and that such correlation isexplained by fluctuations of credit supply around a steady state. We have foundthat, in the period June 2008 to June 2012 (n=17), linear regression of creditgrowth rates on default rates reveals a negative correlation of r=minus 0.6903with R squared=0.4765, and that credit supply fluctuates steadily around thedefault rate with an Internal Steady State Parameter SSP=0.00245 with chisquared=37.47 (v=16, P<.005). We conclude that fluctuations of the total creditused by non-financial corporations are exhaustively explained by variation ofthe independent variable default rate, and that credit variation fluctuatesaround a steady state. We conclude that credit risk management in Italy hasbeen effective in parameterizing credit supply variation to default rateswithin the Basel II operating framework. Basel III prospective countercyclicalpoint in time output buffers based on filtered Credit to GDP ratios and dynamicprovisioning proposals should take into account this underlying steady statestatistical pattern.

Contraction or steady state? An analysis of credit risk management in Italy in the period 2008-2012