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Bank regulation and the credit crunch

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  • Peek, Joe
  • Rosengren, Eric

Abstract

This study investigates the direct link between regulatory enforcement actions and the shrinkage of bank loans to sectors likely to be bank dependent. We focus on New England because that region has experienced both the widespread application of formal regulatory actions and substantial reductions in new lending by banks. Controlling for weakness in loan demand, previous studies have been able to attribute part of this bank shrinkage to loan supply, with the degree of a bank’s shrinkage related to its capital-to-asset ratio. In this study, we further partition the shrinkage due to loan supply into the component due to explicit regulatory enforcement actions and that due to a voluntary response by bank management to low capital-to-asset ratios. We find that banks with formal actions shrink at a significantly faster rate than those without, even after controlling for differences in capital-to-asset ratios. Furthermore, much of the reduced lending has been in loan categories containing primarily bank-dependent borrowers, indicating that the capital crunch has resulted in a credit crunch.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 19 (1995)
Issue (Month): 3-4 (June)
Pages: 679-692

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Handle: RePEc:eee:jbfina:v:19:y:1995:i:3-4:p:679-692

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Web page: http://www.elsevier.com/locate/jbf

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References

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  1. Gertler, Mark & Gilchrist, Simon, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 309-40, May.
  2. Frederick T. Furlong, 1992. "Capital regulation and bank lending," Economic Review, Federal Reserve Bank of San Francisco, pages 23-33.
  3. Gregory E. Elliehausen & John D. Wolken, 1990. "Banking markets and the use of financial services by small and medium- sized businesses," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 801-817.
  4. Joe Peek & Eric Rosengren, 1993. "The Capital Crunch: Neither A Borrower Nor A Lender Be," Boston College Working Papers in Economics 243, Boston College Department of Economics.
  5. Hancock, Diana & Laing, Andrew J. & Wilcox, James A., 1995. "Bank capital shocks: Dynamic effects on securities, loans, and capital," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 661-677, June.
  6. Berger, Allen N & Udell, Gregory F, 1994. "Do Risk-Based Capital Allocate Bank Credit and Cause a "Credit Crunch"' in the United States?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 585-628, August.
  7. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
  8. Joe Peek & Eric S. Rosengren, 1994. "Bank Real Estate Lending and the New England Capital Crunch," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(1), pages 33-58.
  9. Joseph G. Haubrich & Paul Wachtel, 1993. "Capital requirements and shifts in commercial bank portfolios," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 2-15.
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