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Changes in bank lending standards and the macroeconomy

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  • William F. Bassett
  • Mary Beth Chosak
  • John C. Driscoll
  • Egon Zakrajsek

Abstract

Identifying the macroeconomic effects of credit supply disruptions is difficult because many of the same factors that influence the supply of bank loans can also affect the demand for credit. Using bank-level responses to the Federal Reserve's Senior Loan Officer Opinion Survey, we decompose the reported changes in lending standards--a commonly-used indicator of changes in credit supply conditions--into a component that captures the change in banks' lending posture in response to bank-specific and macroeconomic factors that also affect loan demand and a residual component, which provides a cleaner measure of fluctuations in the effective supply of bank-intermediated credit. When included in a standard VAR framework, shocks to our measure of loan supply are associated with substantial declines in output and in the capacity of businesses and households to borrow from the banking sector, as well as with a sharp widening of credit spreads and a significant easing of monetary policy. We corroborate the interpretation of our series as movements in the supply of bank loans using a detailed loan-level data set: A regression of individual loan amounts on the corresponding interest rate spreads--where the latter is instrumented with our bank-level loan-supply shifter--yields the semi-elasticity of loan demand between -1.0 and -1.5.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-24.

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Date of creation: 2012
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Handle: RePEc:fip:fedgfe:2012-24

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Cited by:
  1. Alwyn Young, 2013. "Structural transformation, the mismeasurement of productivity growth and the cost disease of services," LSE Research Online Documents on Economics 54247, London School of Economics and Political Science, LSE Library.
  2. Haroon Mumtaz & Gabor Pinter & Konstantinos Theodoridis, 2014. "What do VARs Tell Us about the Impact of a Credit Supply Shock? An Empirical Analysis," Working Papers 716, Queen Mary, University of London, School of Economics and Finance.
  3. Paolo Del Giovane & Andrea Nobili & Federico Maria Signoretti, 2013. "Supply tightening or lack of demand? An analysis of credit developments during the Lehman Brothers and the sovereign debt crises," Temi di discussione (Economic working papers) 942, Bank of Italy, Economic Research and International Relations Area.
  4. James H. Stock & Mark W. Watson, 2012. "Disentangling the Channels of the 2007-2009 Recession," NBER Working Papers 18094, National Bureau of Economic Research, Inc.
  5. William F. Bassett & Simon Gilchrist & Gretchen C. Weinbach & Egon Zakrajsek, 2011. "Improving Our Ability to Monitor Bank Lending," NBER Chapters, in: Risk Topography: Systemic Risk and Macro Modeling, pages 149-161 National Bureau of Economic Research, Inc.
  6. Ampudia, Miguel & Ehrmann, Michael, 2014. "Macroeconomic experiences and risk taking of euro area households," Working Paper Series 1652, European Central Bank.
  7. Tobias Adrian & Daniel Covitz & Nellie J. Liang, 2013. "Financial stability monitoring," Staff Reports 601, Federal Reserve Bank of New York.
  8. James H. Stock & Mark W. Watson, 2012. "Disentangling the Channels of the 2007-09 Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(1 (Spring), pages 81-156.
  9. Haltenhof, Samuel & Jung Lee, Seung & Stebunovs, Viktors, 2014. "The credit crunch and fall in employment during the Great Recession," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 31-57.
  10. Teodora Paligorova & João A. C. Santos, 2012. "When Is It Less Costly for Risky Firms to Borrow? Evidence from the Bank Risk-Taking Channel of Monetary Policy," Working Papers 12-10, Bank of Canada.
  11. Blaise Gadanecz & Aaron Mehrotra & Madhusudan S Mohanty, 2014. "Foreign exchange intervention and the banking system balance sheet in emerging market economies," BIS Working Papers 445, Bank for International Settlements.
  12. Immo Schott, 2013. "Startups, Credit, and the Jobless Recovery," 2013 Meeting Papers 340, Society for Economic Dynamics.
  13. Marko Malovic & Svetislav Paunovic, 2012. "Flow of Funds in balkan Banks: Narrow Banking or Narrow Escape?," Book Chapters, Institute of Economic Sciences.

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