Financial Instability, Uncertainty and Banks’ Lending Behaviour
26 Pages Posted: 9 Aug 2012
Date Written: August 8, 2012
Why do banks squeeze their lending activity? is an oft-repeated question during the times of financial crisis. This study examines an emerging economy’s banking system and contributes to the evolving body of literature on the topic by providing answers as to what causes the sluggish bank credit during the times of recession. By employing cointegration technique, the study shows that bank credit has a significant positive relationship with the borrowing activity of the banks and on the contrary, inverse relationship with investment activity during the financial crisis. Accordingly, we suggest that banks could increase their lending by increasing the borrowings rapidly either from the Central Banks or from Government supported long term lending institutions during recessionary periods.
Keywords: Time-Series Models, Financial Markets, Interest Rates, Bank lending, Financial Crisis
JEL Classification: C22, D53, E43, E51, G21
Suggested Citation: Suggested Citation