From Wall Street to Main Street: The Impact of the Financial Crisis on Consumer Credit Supply

Abstract

This paper studies how the financial crisis of 2007-2009 affected the supply of credit to the broader economy using a new dataset that describes unique interbank relationships within the credit union industry. We find that balance sheet losses at correspondent credit unions stemming from the collapse of the ABS market are associated with a large contraction in the supply of credit and a hoarding of cash among downstream credit unions. We also find that this credit crunch was concentrated among downstream credit unions which began the crisis with lower capital asset ratios, and that the contraction in credit supply may have amplified the initial decline in house prices. These results suggest that bank capital regulation might shape the ability of banks to transmit securities price volatility onto the real economy.

Keywords: credit, crisis, banking

JEL Classification: G20, G21, E50