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Bank Credit Cycles

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Author Info
GORTON
PING HE

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Abstract

A bank determines whether potential borrowers are creditworthy, that is, whether they meet the bank's credit or lending standards. In making this determination, each bank is in competition with other banks, but without knowing the competitor banks' credit standards. The resulting unique form of competition leads to endogenous credit cycles, periodic "credit crunches". Empirical tests of this repeated bank lending game are constructed based on parameterizing public information about relative bank performance that is at the root of banks' beliefs about rival banks' lending standards. The relative performance of rival banks has predictive power for subsequent lending in the credit card market, where we can identify the main competitors. At the macroeconomic level, the relative bank performance of commercial and industrial loans is an autonomous source of macroeconomic fluctuations. In an asset pricing context, the relative bank performance is a priced risk factor for both banks and non-financial firms. The factor coefficients for non-financial firms are decreasing with size, consistent with smaller firms being more bank dependent. Copyright © 2008 The Review of Economic Studies Limited.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-937X.2008.00497.x
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Publisher Info
Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 75 (2008)
Issue (Month): 4 (October)
Pages: 1181-1214
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Handle: RePEc:bla:restud:v:75:y:2008:i:4:p:1181-1214

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Enrique G. Mendoza & Marco E. Terrones, 2008. "An anatomy of credit booms: evidence from macro aggregates and micro data," International Finance Discussion Papers 936, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  2. Ben Craig & Joseph G. Haubrich, 2006. "Gross loan flows," Working Paper 0604, Federal Reserve Bank of Cleveland. [Downloadable!]
    Other versions:
  3. Kierzenkowski, R. & Oung, V., 2007. "L’évolution des crédits à l’habitat en France : une grille d’analyse en termes de cycles," Documents de Travail 172, Banque de France. [Downloadable!]
  4. Michael D. Bordo & Joseph G. Haubrich, 2009. "Credit Crises, Money and Contractions: an historical view," NBER Working Papers 15389, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Luc Laeven & Deniz Igan & Giovanni Dell'Ariccia, 2008. "Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market," IMF Working Papers 08/106, International Monetary Fund. [Downloadable!]
    Other versions:
  6. Zhang, Zhipeng, 2009. "Who Pulls the Plug? Theory and Evidence on Corporate Bankruptcy Decisions," MPRA Paper 17676, University Library of Munich, Germany, revised 05 Oct 2009. [Downloadable!]
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