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The Capital Crunch: Neither A Borrower Nor A Lender Be

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Listed:
  • Joe Peek

    (Department of Economics, Boston College)

  • Eric Rosengren

    (Federal Reserve Bank of Boston)

Abstract

The dramatic reduction in the growth rate of bank lending associated with the 1990-91 recession, particularly in New England that 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 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, where by poorly capitalized institutions shrink to satisfy capital requirements.

Suggested Citation

  • Joe Peek & Eric Rosengren, 1993. "The Capital Crunch: Neither A Borrower Nor A Lender Be," Boston College Working Papers in Economics 243, Boston College Department of Economics.
  • Handle: RePEc:boc:bocoec:243
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    1. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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    9. Benjamin M. Friedman, 1972. "Credit rationing: a review," Staff Studies 72, Board of Governors of the Federal Reserve System (U.S.).
    10. William P. Osterberg, 1990. "Bank capital requirements and leverage: a review of the literature," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 2-12.
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