Changes in Bank Lending Standards and the Macroeconomy

38 Pages Posted: 10 Feb 2011 Last revised: 27 Apr 2012

William F. Bassett

Board of Governors of the Federal Reserve System (FRB)

Mary Beth Chosak

Board of Governors of the Federal Reserve System

John C. Driscoll

Federal Reserve Board

Egon Zakrajsek

Federal Reserve Board - Division of Monetary Affairs

Date Written: December 21, 2010

Abstract

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

Bassett, William F. and Chosak, Mary Beth and Driscoll, John C. and Zakrajsek, Egon, Changes in Bank Lending Standards and the Macroeconomy (December 21, 2010). Available at SSRN: https://ssrn.com/abstract=1758832 or http://dx.doi.org/10.2139/ssrn.1758832

William F. Bassett

Board of Governors of the Federal Reserve System (FRB) ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Mary Beth Chosak

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

John C. Driscoll (Contact Author)

Federal Reserve Board ( email )

20th and C Streets, NW
Washington, DC 20551
United States

HOME PAGE: http://www.federalreserve.gov/econresdata/john-c-driscoll.htm

Egon Zakrajsek

Federal Reserve Board - Division of Monetary Affairs ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-728-5864 (Phone)
202-452-3819 (Fax)

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