Changes in bank lending standards and the macroeconomy

Abstract

Identifying macroeconomic effects of credit shocks is difficult because many of the same factors that influence the supply of loans also affect the demand for credit. Using bank-level responses to the Federal Reserve's Loan Officer Opinion Survey, we construct a new credit supply indicator: changes in lending standards, adjusted for the macroeconomic and bank-specific factors that also affect loan demand. Tightening shocks to this credit supply indicator lead to a substantial decline in output and the capacity of businesses and households to borrow from banks, as well as to a widening of credit spreads and an easing of monetary policy.

Estimating changes in supervisory standards and their economic effects

“…Particular attention focused on the unique role of commercial banks in the financial system, in large part because they are often viewed as the most efficient or sometimes the sole providers of credit to many households and small businesses. 1 For instance, Lown and Morgan (2006) showed that changes in bank lending standards have important macroeconomic effects, and Bassett, Chosak, Driscoll, and Zakrajšek (2014) document the large contractionary shock to lending standards during the recent financial crisis and its material effects on lending and measures of economic output. Haltenhof, Lee, and Stebunovs (2014) show stricter lending standards contributed significantly to the fall in employment during the Great Recession.…”

Credit-Market Sentiment and the Business Cycle

“…The same 25th-to-75th-percentile change in credit-market sentiment as of t − 2 forecasts a cumulative decline in business Note: The x-axis shows the average net fraction of banks that reported in the quarterly Senior Loan Officer Opinion Surveys in year t that they had tightening lending standards on loans to businesses and households (see Bassett, Chosak, Driscoll, and Zakrajšek, 2014). The y-axis shows the estimate of credit-market sentiment in year t from the auxiliary forecasting regression in column (1) of Panel A in Table 3.…”

“…in bank lending standards constructed by Bassett, Chosak, Driscoll, and Zakrajšek (2014), using bank-level responses to the Federal Reserve's Senior Loan Officer Opinion Survey. Perhaps not surprisingly, there is a close correlation between these two credit-supply indicators: In years in which our bond-market-based measure shows credit sentiment to be relatively upbeat, bank loan officers tend to report that they are easing credit standards on loans to businesses and households.…”

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“…9 These three variables are applied in the extant literature; see, e.g., Christiano et al (1996), Leeper et al (1996), Lown and Morgan (2006), Bassett et al (2014), Ciccarelli et al (2013Ciccarelli et al ( , 2015, and Dajcman (2016). 10 While before the global financial crisis there was a growing consensus that in the euro area EONIA was a good indicator of the Eurosystem's monetary policy stance (Busch et al, 2010;Ciccarelli et al, 2013, Ciccarelli et al, 2015, it is argued that once the policy rate hits the zero lower bound EONIA may not consistently reflect the central bank's monetary policy stance (Lombardi and Zhu, 2014;Gambacorta et al, 2014;Wu and Xia, 2015).…”