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The capital crunch: neither a borrower nor a lender be

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  • Joe Peek
  • Eric Rosengren

Abstract

The dramatic reduction in the growth rate of bank lending associated with the 1990-91 recession, particularly in New England, has evoked claims by many observers of a credit crunch. However, because of the difficulty in determining whether the observed slow credit growth is a demand or supply phenomenon, convincing evidence of the practical importance of credit crunches for economic activity remains elusive. We overcome this obstacle by examining a cross-section of banks in New England that have experienced the same economic downturn, effectively controlling for changes in demand. We find empirical support for a capital crunch, whereby poorly capitalized institutions shrink to satisfy capital requirements. This alone is not a sufficient condition for a credit crunch. However, we find s6me additional evidence that the capital crunch may have limited credit availability in New England.

Suggested Citation

  • Joe Peek & Eric Rosengren, 1991. "The capital crunch: neither a borrower nor a lender be," Working Papers 91-4, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:91-4
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    Keywords

    Bank capital; New England;

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