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Resuming bank lending in the aftermath of the Capital Purchase Program

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Abstract

In the second half of 2008, after a series of bankruptcies of large financial institutions, the U.S. Treasury poured capital infusions into domestic financial institutions under the Capital Purchase Program (CPP), thus helping to avert a complete collapse of the U.S. banking sector. In this article the effectiveness of the Capital Purchase Program is analysed in terms of restoring banks' loan provisions. The relative impacts of liquidity shortages (which negatively affected banks' willingness to lend) and the contraction in aggregate demand for bank loans are examined. The empirical evidence on the effects of capital shortages supports the theory. Banks that have a higher level of capitalisation tend to lend more both during the crisis and in normal times. Moreover, it is found that bailed-out banks displayed higher growth rates of loans during the crisis than in normal times (before 2008) as well as higher rates compared with non-bailed banks during the crisis, with a one percentage point increase in the capital ratio. In addition, bailed-out banks that repurchased their shares from the U.S. Treasury provided more loans during the crisis than those banks that did not

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  • Varvara Isyuk, 2014. "Resuming bank lending in the aftermath of the Capital Purchase Program," Documents de travail du Centre d'Economie de la Sorbonne 14062, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  • Handle: RePEc:mse:cesdoc:14062
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    More about this item

    Keywords

    Capital Purchase Program; bank lending; credit growth; liquidity provisions;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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