A note on bank loan officers' expectations for credit standards: Evidence from the European bank lending survey

• DOI: http://doi.org/10.1002/ijfe.1648
• Published date: 01 January 2019
• Date: 01 January 2019
• Author: Dimitrios Anastasiou,Konstantinos Drakos

RESEARCH ARTICLE

A note on bank loan officers'expectations for credit

standards: Evidence from the European bank lending

survey

Dimitrios Anastasiou | Konstantinos Drakos

Department of Accounting and Finance,

Athens University of Economics and

Business, Athens, Greece

Correspondence

Konstantinos Drakos, Department of

Accounting and Finance, Athens

University of Economics and Business, 76

Patission Street, Athens 10434, Greece.

Email: kdrakos@aueb.gr

JEL Classification: C33; C53; D84

Abstract

We employ quarterly credit standards data from the Bank Lending Survey,

covering 14 EU countries for the period 2003 Q1 to 2016 Q1. By linking

consecutive surveys and utilizing loan officers'responses regarding actual

and expected credit standards, we set out to investigate which expectations

formation mechanism best describes loan officers'expectations. According to

our findings, bank loan officers'expectations are compatible with the adaptive

expectations mechanism.

KEYWORDS

adaptive expectations, bank lending survey, credit standards, random effects, survey‐based

expectations

1|INTRODUCTION

Monetary authorities assess banking sector conditions in

order to design and implement appropriate policies, not

only by relying on “hard”statistics but also by

complementing them with “soft”information that reflects

supply and demand conditions. For instance, in the case

of the euro area, a typical “soft”information set is pro-

vided by the bank lending survey (BLS hereafter), whose

integral part are the responses of bank loan officers

regarding the future trajectory of loan credit standards

(CSs hereafter) set by their banks. However, the useful-

ness of these responses crucially depends on the ability

of bank loan officers to ‘correctly’predict the further path

of bank CSs.

This is exactly the aim of our analysis, where we will

exploit survey responses from consecutive surveys in

order to investigate how bank loan officers'expectations

of future CS perform when confronted with realized

outcomes. Essentially, in any given BLS issue bank loan

officers are asked to respond on the previous period's

CSs as well as the expected (future) ones. Thus, by linking

consecutive survey responses, we explore whether loan

officers'expectations are formed rationally, and if

deviations from rationality exist, we investigate whether

they comply with well‐known expectations'formation

mechanisms.

Muth (1961) was the first who introduced the idea of

rational expectation hypothesis (REH hereafter), which

has not always been met with empirical success. For

instance, Chow (1989, 2011) supported that adaptive

expectations are better than rational expectations. An

important disadvantage of testing the REH empirically

is the fact that the expectation errors are usually formed

through ex‐post observed data. A way to bypass this

disadvantage is to measure expectations by relying on

survey data (Drakos, 2008; Miah, Saifur, & Khalid, 2016

and Pesaran & Weale, 2006).

2|DATA ISSUES

For CS, we utilize data from the BLS, which is conducted

on a quarterly basis by the European Central Bank (ECB)

Received: 7 February 2017 Revised: 22 February 2018 Accepted: 26 June 2018

DOI: 10.1002/ijfe.1648

Int J Fin Econ. 2019;24:49–53. © 2018 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/ijfe 49