Author: Matt Waldman

Published

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Economics professor Berrak Bahadir’s research shows that if banks have enough credit information on borrowers it can mitigate the potential for a banking crisis.

Berrak Bahadir developed a fascination for credit long before she became an economics professor. It happened back in 1999 when Bahadir was playing professional basketball in her hometown of Istanbul, Turkey, and also going to school to earn her undergraduate degree in finance. When she and her mother decided to combine their savings and buy a car, the dealership told them they could finance a car with a zero interest rate for six months. The topic of credit immediately piqued Bahadir’s curiosity.

“Turkey experienced a significant financial liberalization during the late ’80s and early ’90s, and household credit growth was rising because the capital that was flowing into the country was channeled into households,” says Bahadir, whose fascination for the topic was accentuated by the Turkish banking crisis hit in 2001. “The dollar appreciated by 100 percent in a day and I saw people losing their wealth in a night. Until 2001, there was really easy, cheap credit, and Turkey experienced a huge economic growth driven by this consumption boom. My friends and my parents’ friends were buying cars and houses and taking vacations, but I thought something was wrong with this. People were spending money that was not really theirs.”

Bahadir’s 2012 paper, “Credit Information Sharing and Banking Crisis: An Empirical Investigation,” co-authored with Georgia State professor Neven Valev and published in the Journal of Macroeconomics, is an idea that stemmed from Bahadir’s overall research agenda to understand whether credit is a good or bad thing for the economy. Her interest in credit expansions and banking crises led to her exploration of credit information sharing.

“I started thinking that if banks had enough information about its borrowers that it might mitigate some of the effects of credit expansions,” says Bahadir, who explains that current academic literature links rapid credit expansions by banks to economic crises. “Although rapid credit expansions are still bad and can lead to these crises, the research demonstrates that if banks have quality depth of information on its potential borrowers such as credit history, income, and other assets, this information sharing supports a more stable banking system and can have a negative effect on the probability of having a nationwide banking crisis.”

Bahadir says credit expansions can spur growth if it leads to capital accumulation. However, if the credit expansion fails to deliver permanent income growth then debt to income levels increase; as a consequence, higher interest rates, a decline in asset prices, or a negative income shock may precipitate a crisis.

“It is important to distinguish between household and business credit,” says Bahadir. “Borrowing to finance consumption does not add to the productive capacity of an economy and therefore is more likely to hurt the economy.”