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http://ssrn.com/abstract=386622
 
 

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The Institutional Memory Hypothesis and the Procyclicality of Bank Lending Behavior


Allen N. Berger


University of South Carolina - Moore School of Business; Wharton Financial Institutions Center; Tilburg University - CentER

Gregory F. Udell


Indiana University Bloomington - Department of Finance

April 2003

FEDS Working Paper No. 2003-02
BIS Working Paper No. 125

Abstract:     
Stylized facts suggest that bank lending behavior is highly procyclical. We test a new hypothesis that may help explain why this occurs. The institutional memory hypothesis is driven by deterioration in the ability of loan officers over the bank's lending cycle that results in an easing of credit standards. This easing of standards may be compounded by simultaneous deterioration in the capacity of bank management to discipline its loan officers and reduction in the capacities of external stakeholders to discipline bank management. We test the empirical implications of this hypothesis using data from individual U.S. banks over the period 1980-2000. We employ over 200,000 observations on commercial loan growth measured at the bank level, over 2,000,000 observations on interest rate premiums on individual loans, and over 2,000 observations on credit standards and bank-level loan spreads from bank management survey responses. The empirical analysis provides support for the hypothesis.

Number of Pages in PDF File: 39

Keywords: Banks, Lending, Business Cycles

JEL Classification: G21, G28, E32, E44

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Date posted: December 13, 2005  

Suggested Citation

Berger, Allen N. and Udell, Gregory F., The Institutional Memory Hypothesis and the Procyclicality of Bank Lending Behavior (April 2003). FEDS Working Paper No. 2003-02; BIS Working Paper No. 125. Available at SSRN: http://ssrn.com/abstract=386622 or http://dx.doi.org/10.2139/ssrn.386622

Contact Information

Allen N. Berger (Contact Author)
University of South Carolina - Moore School of Business ( email )
1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)
Wharton Financial Institutions Center
Philadelphia, PA 19104-6367
United States
Tilburg University - CentER
P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands
Gregory F. Udell
Indiana University Bloomington - Department of Finance ( email )
1309 E. 10th St.
Bloomington, IN 47405
United States
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