U.S. Bank Behavior in the Wake of the 2007-2009 Financial Crisis
The paper examines the slowdown of lending by large U.S. banks over the period 2007Q3 - 2009Q2, focusing on: (i) whether capital or liquidity was the binding constraint; (ii) factors influencing banksâ€™ decision to hold capital; and (iii) their pricing behavior. Using quarterly data for the largest U.S. banks, the paper finds that capital, rather than liquidity, constrained lending. Banks took actions to increase capital by slowing lending and raising profit margins, not fully passing through the Federal Reserveâ€™s interest rate cuts. Banks optimally choose capital based on the expected future demand for loans and the marginal cost of capital.
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- Asani Sarkar, 2009. "Liquidity risk, credit risk, and the Federal Reserve's responses to the crisis," Staff Reports 389, Federal Reserve Bank of New York.
- Todd Keister & James McAndrews, 2009.
"Why are banks holding so many excess reserves?,"
380, Federal Reserve Bank of New York.
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