Changes in Bank Lending Standards and the Macroeconomy

41 Pages Posted: 9 May 2012  

John C. Driscoll

Federal Reserve Board

Egon Zakrajsek

Federal Reserve Board - Division of Monetary Affairs

Mary Beth Chosak

Board of Governors of the Federal Reserve System

William F. Bassett

Board of Governors of the Federal Reserve System (FRB)

Date Written: April 26, 2012

Abstract

Identifying the macroeconomic effects of credit supply disruptions is difficult because many of the same factors that influence the supply of bank loans can also affect the demand for credit. Using bank-level responses to the Federal Reserve's Senior Loan Officer Opinion Survey, we decompose the reported changes in lending standards -- a commonly-used indicator of changes in credit supply conditions -- into a component that captures the change in banks' lending posture in response to bank-specific and macroeconomic factors that also affect loan demand and a residual component, which provides a cleaner measure of fluctuations in the effective supply of bank-intermediated credit. When included in a standard VAR framework, shocks to our measure of loan supply are associated with substantial declines in output and in the capacity of businesses and households to borrow from the banking sector, as well as with a sharp widening of credit spreads and a significant easing of monetary policy. We corroborate the interpretation of our series as movements in the supply of bank loans using a detailed loan-level data set: A regression of individual loan amounts on the corresponding interest rate spreads -- where the latter is instrumented with our bank-level loan-supply shifter -- yields the semi-elasticity of loan demand between −1.0 and −1.5.

Keywords: Credit supply shocks, bank credit policies, financial accelerator

JEL Classification: E32, E44

Suggested Citation

Driscoll, John C. and Zakrajsek, Egon and Chosak, Mary Beth and Bassett, William F., Changes in Bank Lending Standards and the Macroeconomy (April 26, 2012). FEDS Working Paper No. 2012-24. Available at SSRN: https://ssrn.com/abstract=2055221 or http://dx.doi.org/10.2139/ssrn.2055221

John C. Driscoll

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)

Mary Beth Chosak

Board of Governors of the Federal Reserve System ( email )

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

William F. Bassett (Contact Author)

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

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

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