Bank Lending Behavior during Global Financial Crisis

We investigate an emerging economy's bank lending behavior during the global financial crisis and provide answers as to what causes the inert bank lending during the periods of crisis. By employing cointegration technique, we show that bank lending has a significant positive relationship with the borrowing activity of the banks and, in contrast, an inverse relationship with investment activity during the financial crisis. Indian banks were not exposed to subprime related assets, and hence the crisis after Lehman could be regarded as an exogenous liquidity shock. We observe that following the liquidity shock owing to the crisis, banks' lending schedules became considerably steeper, suggesting that the bank-lending channel of traditional monetary policy may not have been working during the crisis period.