U.S. Bank Behavior in the Wake of the 2007-2009 Financial Crisis

31 Pages Posted: 4 Jun 2010

See all articles by Ralph Chami

Ralph Chami

International Monetary Fund (IMF)

Dalia Hakura

International Monetary Fund (IMF)

Thomas F. Cosimano

University of Notre Dame; International Monetary Fund

Adolfo Barajas

International Monetary Fund (IMF) - Western Hemisphere Department

Date Written: May 2010

Abstract

The paper examines the slowdown of lending by large U.S. banks over the period 2007Q3 - 2009Q2, focusing on: (i) whether capital or liquidity was the binding constraint; (ii) factors influencing banks’ decision to hold capital; and (iii) their pricing behavior. Using quarterly data for the largest U.S. banks, the paper finds that capital, rather than liquidity, constrained lending. Banks took actions to increase capital by slowing lending and raising profit margins, not fully passing through the Federal Reserve’s interest rate cuts. Banks optimally choose capital based on the expected future demand for loans and the marginal cost of capital.

Keywords: Bank credit, Capital, Interest rates on loans, Global Financial Crisis 2008-2009, Liquidity

Suggested Citation

Chami, Ralph and Hakura, Dalia and Cosimano, Thomas F. and Barajas, Adolfo, U.S. Bank Behavior in the Wake of the 2007-2009 Financial Crisis (May 2010). IMF Working Papers, Vol. , pp. 1-30, 2010. Available at SSRN: https://ssrn.com/abstract=1620250

Ralph Chami

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6039 (Phone)
202-623-6068 (Fax)

Dalia Hakura

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Thomas F. Cosimano

University of Notre Dame ( email )

513 W. Broad #704
Falls Church, VA 22046
United States
574-807-4876 (Phone)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Adolfo Barajas

International Monetary Fund (IMF) - Western Hemisphere Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-4152 (Phone)
202-623-6070 (Fax)

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