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Financial Instability, Uncertainty and Banks’ Lending Behaviour

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  • Swamy, Vighneswara
  • S, Sreejesh

Abstract

Why do banks squeeze their lending activity? is an oft-repeated question during the times of financial crisis. This study examines an emerging economy’s banking system and contributes to the evolving body of literature on the topic by providing answers as to what causes the sluggish bank credit during the times of recession. By employing cointegration technique, the study shows that bank credit has a significant positive relationship with the borrowing activity of the banks and on the contrary, inverse relationship with investment activity during the financial crisis. Accordingly, we suggest that banks could increase their lending by increasing the borrowings rapidly either from the Central Banks or from Government supported long term lending institutions during recessionary periods.

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File URL: http://mpra.ub.uni-muenchen.de/47518/
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File URL: http://mpra.ub.uni-muenchen.de/49599/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 47518.

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Date of creation: 2012
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Publication status: Published in International Journal of Banking and Finance 4.9(2013): pp. 74-95
Handle: RePEc:pra:mprapa:47518

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Keywords: Time-Series Models; Financial Markets; Interest Rates; Bank lending; Financial Crisis;

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  1. James G. MacKinnon & Alfred A. Haug & Leo Michelis, 1996. "Numerical Distribution Functions of Likelihood Ratio Tests for Cointegration," Working Papers 1996_07, York University, Department of Economics.
  2. James G. MacKinnon, 1995. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Working Papers 918, Queen's University, Department of Economics.
  3. Peter C.B. Phillips, 1988. "Optimal Inference in Cointegrated Systems," Cowles Foundation Discussion Papers 866R, Cowles Foundation for Research in Economics, Yale University, revised Aug 1989.
  4. Demirguc-Kunt, Asli & Detragiache, Enrica & Gupta, Poonam, 2000. "Inside the crisis : an empirical analysis of banking systems in distress," Policy Research Working Paper Series 2431, The World Bank.
  5. Charles W. Calomiris & Berry Wilson, 2004. "Bank Capital and Portfolio Management: The 1930s "Capital Crunch" and the Scramble to Shed Risk," The Journal of Business, University of Chicago Press, vol. 77(3), pages 421-456, July.
  6. Frederic S. Mishkin, 2000. "Lessons from the Asian Crisis," NBER Working Papers 7102, National Bureau of Economic Research, Inc.
  7. de Haas, Ralph & van Lelyveld, Iman, 2006. "Foreign banks and credit stability in Central and Eastern Europe. A panel data analysis," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1927-1952, July.
  8. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  9. 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.
  10. Franklin Allen & Elena Carletti, 2010. "An Overview of the Crisis: Causes, Consequences, and Solutions-super-," International Review of Finance, International Review of Finance Ltd., vol. 10(s1), pages 1-26.
  11. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  12. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
  13. Frederic S. Mishkin, 1999. "Global Financial Instability: Framework, Events, Issues," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 3-20, Fall.
  14. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
  15. Mark Gertler, 2010. "Commentary: Banking Crises and Real Activity: Identifying the Linkages," International Journal of Central Banking, International Journal of Central Banking, vol. 6(34), pages 125-135, December.
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