Keywords: Banks, lending, business cycles
Abstract: Stylized facts suggest that bank lending behavior is highly procyclical.
We offer a new hypothesis that may help explain why this occurs.
The institutional memory hypothesis is driven by deterioration in
the ability of loan officers over the bank's lending cycle that
results in an easing of credit standards. This easing of standards
may be compounded by simultaneous deterioration in the capacity of
bank management to discipline its loan officers and reduction in the
capacities of external stakeholders to discipline bank management.
We test the empirical implications of this hypothesis using data from
individual U.S. banks over the period 1980-2000. We employ over
200,000 observations on commercial loan growth measured at the bank
level, over 2,000,000 observations on interest rate premiums on
individual loans, and over 2,000 observations on credit standards
and bank-level loan spreads from bank management survey responses.
The empirical analysis provides support for the hypothesis.
Full paper (299 KB PDF)
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Last update: February 27, 2003