How business moods affect lending decisions


What role do optimistic and pessimistic expectations play in the financial markets? And how do these sentiments affect banks’ lending decisions? This question is at the heart of a recent study by Professor Ingrid Kubin, head of the Institute for International Economics and Development at WU (Vienna University of Economics), and her co-authors.

The types of collateral that lenders demand as a security when awarding loans depend to a large extent on whether the lenders have positive or negative expectations for the development of the economy. For lenders with a positive outlook who expect favorable economic developments, the collaterals they demand from their borrowers are smaller in volume. This makes it easier for borrowers to obtain bank loans. If the sentiment is negative, however, lenders fear that the borrowers may default on their loans and therefore step up their collateral requirements.

Using a macroeconomic mathematical model, the researchers were able to show that swings between pessimistic and optimistic sentiment lead to stronger income fluctuations over the business cycle. At the same time, the cycles become more regular. The study shows that the financial markets are influenced by behavioral aspects. The findings provide the basis for more applied research on how to design regulation schemes for financial markets. The goal of this research is to make economies more stable and resilient.

About Ingrid Kubin

Ingrid Kubin has been the head of WU Vienna’s Institute for International Economics and Development since 2002. A native of Austria, she studied economics and law at JKU Linz and the University of Graz. She first worked as an assistant professor and then as a full professor in Graz, Mainz, and Paris, and in 2002, she was became full professor of international economics at WU. Ingrid Kubin has held teaching assignments in China and completed research stays in Italy, the UK, France, and the Netherlands.

In her research, she focuses mainly on the theory of economic dynamics in the fields of (monetary) macroeconomics and international economics. Her work has been published in leading journals such as Structural Change and Economic Dynamics, Mathematical Social Sciences, and the Journal of Economic Dynamics and Control.

Researcher of the Month

With the Researcher of the Month series, launched in 2016, WU honors outstanding researchers whose work has made important contributions to solving key economic, social, and legal issues. Our monthly Researcher of the Month video provides insights into the day-to-day work of our researchers and offers glimpses behind the scenes of WU’s diverse research activities.

Links for further information

Ingrid Kubin’s Researcher of the Month video

Ingrid Kubin, Thomas O. Zörner, Laura Gardini, Pasquale Commendatore: A credit cycle model with market sentiments

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