Credit Cycles &amp; Debt Restructuring: Refining Theoretical Flaws

Dmitry Vladimirovich Burakov

doi:10.5539/res.v6n4p1

Abstract

In this article we set ourselves the task to determine the place of the debt restructuring process upon various phases of the credit cycle. Given the fact that modern theories of credit cycle do not emit debt restructuring as an essential element of the credit cycle development, using data on the development of the Russian banking sector for the period from 2004 to 2012, we analyze the specifics of debt restructuring in the banks’ activity. In the study we have identified patterns of restructuring processes’ dynamics and correlated them with the phases of the credit cycle. Also as a result of the research we propose and test methods of the restructuring trend’s identification on the example of the Russian banking sector. The hypothesis of the natural rate of restructuring and deviations from it at the different phases of the credit cycle is also stated. In particular, we believe that restructuring is a natural process in credit relations, but in the pre-crisis period of expansion and the phase of the credit crunch, debt restructuring deviates from the threshold values and changes its role of the instrument of maintaining stability on the credit market to become a deterrent to clear the market of bad debts.

Highlights

The problem of credit dynamics today is one of the key problems of optimization of economic system’s development
We believe that restructuring is a natural process in credit relations, but in the pre-crisis period of expansion and the phase of the credit crunch, debt restructuring deviates from the threshold values and changes its role of the instrument of maintaining stability on the credit market to become a deterrent to clear the market of bad debts
In the period of a stable credit expansion debt restructuring (DR) is in the range of the natural trend; Overheating in the credit market by the end of the credit expansion, with strengthening of growth in overdue debt pushes DR beyond its natural rate; DR is aimed at mitigation of arising problems in the credit market

Summary

Introduction

The problem of credit dynamics today is one of the key problems of optimization of economic system’s development. Even studies of developed countries support the idea that debt restructuring is an essential mechanism to ensure the stability of credit market functioning and national markets in general. This mechanism acts as a kind of safeguard against the possible realization of tail risks in the market - unforeseen events that result in increasing the probability of default of the borrower for reasons, not related with his activities. In other words, such vagueness of definitions does not eliminate a problem of describing and explaining the patterns of the restructuring process movement, its natural rate, the relative levels of DR use in different countries and many others

Methodologies

Debt Restructuring

Methods of Identification

Debt Restructuring and Phases of the Credit Cycle

Conclusion