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Bank regulatory agreements in New England

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  • Joe Peek
  • Eric S. Rosengren

Abstract

New England's recovery from our most recent recession has been marked by unusually slow growth in bank lending. As of the third quarter of 1994, total loans still had recovered only to 76 percent of the level attained at the peak in the third quarter of 1989. Numerous recent studies have identified low bank capital ratios as a factor contributing to slow growth in loans, but a direct link between the level of bank lending and bank regulation has been established only recently.> To better understand how regulatory policy might directly influence bank lending, this article examines the ways that bank supervisors intervene when a bank's financial situation deteriorates. If a bank's problems are serious, regulators will impose a formal action, a legally enforceable agreement requiring a bank to improve its performance. Among the conditions included in formal regulatory actions, capital requirements have played a key role in altering bank lending behavior. The study documents that the correlation between bank capital and loan shrinkage found in earlier studies has a regulatory link, through the requirements imposed in formal actions.

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Bibliographic Info

Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (1995)
Issue (Month): May ()
Pages: 15-24

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Handle: RePEc:fip:fedbne:y:1995:i:may:p:15-24

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Keywords: Banks and banking - New England;

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Cited by:
  1. Wako Watanabe, 2004. "Does a Large Loss of Bank Capital Cause Ever-greening or Flight to Quality?: Evidence from Japan," ISER Discussion Paper 0618, Institute of Social and Economic Research, Osaka University.
  2. Degryse, H.A. & Ongena, S., 2002. "Bank-firm relationships and international banking markets," Open Access publications from Tilburg University urn:nbn:nl:ui:12-92220, Tilburg University.
  3. Shinichi Nishiyama & Tae Okada & Wako Watanabe, 2006. "Do Banks Reduce Lending Preemptively in Response to Capital Losses?," Discussion papers 06016, Research Institute of Economy, Trade and Industry (RIETI).
  4. Wako Watanabe, 2004. "Prudential Regulation, the Credit Crunch" and the Ineffectiveness of Monetary Policy: Evidence from Japan," ISER Discussion Paper 0617, Institute of Social and Economic Research, Osaka University.
  5. Steven Ongena, 1999. "Lending Relationships, Bank Default and Economic Activity," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 6(2), pages 257-280.
  6. Jordan, John S. & Peek, Joe & Rosengren, Eric S., 2000. "The Market Reaction to the Disclosure of Supervisory Actions: Implications for Bank Transparency," Journal of Financial Intermediation, Elsevier, vol. 9(3), pages 298-319, July.
  7. Guizani, Brahim, 2010. "Regulation Policy And Credit Crunch: Evidence From Japan," MPRA Paper 46827, University Library of Munich, Germany, revised 08 May 2013.
  8. Watanabe, Wako, 2010. "Does a large loss of bank capital cause Evergreening? Evidence from Japan," Journal of the Japanese and International Economies, Elsevier, vol. 24(1), pages 116-136, March.
  9. Guizani, Brahim, 2014. "Capital Requirements, Banking Supervision and Lending Behavior: Evidence from Tunisia," MPRA Paper 54234, University Library of Munich, Germany.

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