Financial Crisis and Bank Lending

38 Pages Posted: 17 Mar 2010

See all articles by Simon H. Kwan

Simon H. Kwan

Federal Reserve Bank of San Francisco

Date Written: March 15, 2010


This paper estimates the amount of tightening in bank C&I loan rates during the financial crisis. After controlling for loan characteristics and bank fixed-effects, the average C&I loan spread was about 61 basis points higher in 2009:Q4 than an otherwise similar loan made under the average condition between 1997 and 2008. It was about 71 basis points higher when compared to 2008:Q4. The findings are robust with respect to the large bank and the medium bank subsamples. Small banks, however, did not seem to tighten their loan rates by as much as larger banks.

To delve deeper into how the tightening took place, cross sectional regressions of loan rate spreads on loan characteristics and bank financial condition are performed at each quarter to produce time-series of the estimated effects. The results indicate that during the financial crisis, banks lowered the discount on loan size, charged a higher price of risk, imposed surcharges on loans that were not made under commitment, and reduced the discount on collateralized loans (versus unsecured loans).

Banks’ own financial condition was found to have significant effects on loan price. During the financial crisis, the factor loading of delinquent loans in a bank’s own portfolio on loan spreads rose. Combined with rising loan delinquency, the portfolio effect alone led to substantially higher spreads. The amount of unused loan commitments is also found to have a significant effect on loan spreads, providing further evidence of the supply-side effects on loan pricing. Profitability, however, was not found to have a significant effect on spreads.

Keywords: Financial Crisis, Bank Lending, Credit Tightening

JEL Classification: G21, G12

Suggested Citation

Kwan, Simon H., Financial Crisis and Bank Lending (March 15, 2010). Available at SSRN: or

Simon H. Kwan (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3190 (Phone)

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