Changes in Bank Lending Standards and the Macroeconomy
38 Pages Posted: 10 Feb 2011 Last revised: 27 Apr 2012
Date Written: December 21, 2010
Researchers have long hypothesized that exogenous changes to the supply of bank loans should affect economic activity. However, identifying such loan supply shocks is difficult, since loan supply and demand likely share many determinants. In this paper, we use the Federal Reserve's quarterly Senior Loan Officer Opinion Survey to create a new measure of exogenous changes in lending standards, which in turn affect the supply of loans. We regress banks' individual responses to questions on how they have changed their lending standards over the preceding three months on bank-specific and macroeconomic variables that would be expected to affect loan demand or supply. We aggregate the residuals from this regression across banks to create a quarterly series of unexplained changes in bank lending standards from 1992 to 2010. This series accords well with narrative accounts of the period, for example showing sharp and historically large tightenings in 2007 and 2008. When we include the shock measure as the exogenous variable in a VAR-X model with growth in real GDP, inflation, growth in bank lending capacity, a credit spread index, and the federal funds rate, we find economically large effects of shocks to changes in lending standards. A one standard deviation increase in tightening leads to a drop in real GDP of 0.4 percent in the first year after the shock. The effects are asymmetric, with tightenings having larger effects than easings. Using the shocks as an instrument in a regresion of loan quantities on loan spreads, we estimate the semi-elasticity of loan demand to be -1.4.
Keywords: bank credit channel, broad credit channel, financial accelerator, loan supply shocks
JEL Classification: E32, E44
Suggested Citation: Suggested Citation