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 - Department of Finance
FEDS Working Paper No. 2003-02
BIS Working Paper No. 125
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, E44working papers series
Date posted: December 13, 2005
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