U.S. BANK LENDING ACTIVITY IN THE POSTCRISIS WORLD

• DOI: http://doi.org/10.1111/jfir.12112
• Date: 01 December 2016
• Published date: 01 December 2016

U.S. BANK LENDING ACTIVITY IN THE POSTCRISIS WORLD

Ken B. Cyree

University of Mississippi

Mark D. Griffiths

University of Southern California

Drew B. Winters

Texas Tech University

Abstract

There are three main reasons banks may not be lending. First, banks could be rationing

credit. We show that banks have excess reserves of more than $2 trillion, so demand

exceeding supply is unlikely. Second, banks could be experiencing a capital crunch. We

find no evidence of a capital crunch. Third, banks could be choosing to restrict lending,

creating a credit crunch. We find that postcrisis loan growth rates are lower than crisis

loan growth rates, but postcrisis loan growth is similar to precrisis growth. We find no

evidence to suggest that banks are systematically restricting lending.

JEL Classification: G01, G21

I. Introduction

In the recent financial crisis, many U.S. banks were forced to write down large amounts

of their assets, especially large and systemically relevant (too-big-to-fail) banks.

1

These

write-downs may have led to the assertion of a credit crunch by many politicians and

analysts. Comments in the media such as, “Banks are indeed showing signs of paranoia

to extend new loans. The ones that are approved take much longer to close”

2

are

commonplace even in 2013–2014. Accordingly, the genesis of this article is the simple

question: Are banks lending after the crisis?

Banks are, of course, lending after the crisis, but our basic question is intended

to reflect the hyperbole in the negative press banks continue to receive. Our research

question is: How does postcrisis lending compare to earlier periods? To address our

Much of this paper was completed while Mark D. Griffiths was the Jack Anderson Professor of Finance at

Miami University. The authors thank the reviewer (Dan Thornton) for comments to improve our paper.

1

Banks classified as too big to fail are based on whether the Federal Reserve publicly announced its

requirement to be “stress tested”in April 2009 and were not classified as investment banks. The too-big-to-fail

banks are BB&T, Capital One, Citigroup, Fifth Third, Keycorp, PNC Financial, Regions Bank, State Street Bank,

Suntrust, US Bancorp, and Wells Fargo.

2

Richard Finger, “Banks Are Not Lending Like They Should, and with Good Reason,”Forbes (May 30,

2013). Available at http://www.forbes.com/sites/richardfinger/2013/05/30/banks-are-not-lending-like-they-

should-and-with-good-reason/ (accessed August 23, 2014).

The Journal of Financial Research Vol. XXXIX, No. 4 Pages 389–410 Winter 2016

389

© 2016 The Southern Finance Association and the Southwestern Finance Association

RAWLS COLLEGE OF BUSINESS, TEXAS TECH UNIVERSITY

PUBLISHED FOR THE SOUTHERN AND SOUTHWESTERN

FINANCE ASSOCIATIONS BY WILEY-BLACKWELL PUBLISHING

research question, we examine bank lending and related activities following the financial

crisis, and compare postcrisis levels to levels during the financial crisis and a precrisis

period. There are three possible causes for excessive loan supply restrictions after the

crisis: credit rationing, a capital crunch, and a credit crunch.

3

We begin by examining the possibility of credit rationing. Credit rationing is a

situation of permanent excess demand. In response to the financial crisis, economic

policy makers established a veritable “alphabet soup”of special programs designed to

provide liquidity to support the banking and money market sectors, financial firms, and

automobile manufacturers.

4

In addition, the Federal Reserve (Fed) undertook an

extensive period of quantitative easing (QE) from mid-2008 that lasted through the end

of our sample period. One result of these actions is the build-up of over $2 trillion of

immediately loanable excess reserves.

5

With these extreme measures taken to increase

the supply of available credit, we conclude that credit rationing is unlikely.

Next, we examine the possibility of a capital crunch. Bank capital is regulated

with regulatory minimums and is measured as the ratio of capital to risk-weighted total

assets or, in the case of the leverage ratio, Tier 1 equity to assets. Banks can improve their

capital ratio by reducing total assets and/or the percentage of assets in risky loans. We

find that domestically chartered banks did neither; hence, we dismiss on a prima facie

basis, a postcrisis capital crunch.

6

These basic results allow our analysis to focus on our research question: How

does postcrisis lending compare to earlier periods? This is the examination of the third

possibility for a limited supply of loans: a credit crunch.

We begin our analysis of bank lending with commercial and industrial (C&I)

loans as Berger and Udell (1994, p. 586) suggest a credit crunch is “significant reduction

in the supply of banking sector credit available to commercial borrowers.”We find that

the amount of postcrisis C&I loans is larger than the amount of precrisis C&I loans.

However, we find that C&I loans as a percentage of total assets is lower for the majority

of the postcrisis period than during the precrisis period, but recovers to precrisis

percentages by the end of our sample (December 2013). Also, the postcrisis growth in

C&I loans is lower than precrisis growth and crisis growth.

We expand our analysis to examine bank lending in general. We find that total

loan growth is slower during the postcrisis period than in both the precrisis and crisis

periods. Next, we examine different loan categories (real estate loans, construction loans,

3

Some argue that a credit crunch is a generic part of the business cycle (Sinai 1993; Wojnilower 1980),

whereas in most empirical studies it is seen as an isolated incident (Bernanke and Lown 1991; Owens and Schreft

1992; Peek and Rosengreen 1995). In the case of an isolated shock, property market crashes or changes in banking

regulation are often seen as likely causes. Berger and Udell (1994, p. 586) define a credit crunch as a “significant

reduction in the supply of credit available to commercial borrowers.”

4

In an attempt to provide access to short-term debt funding, the Fed implemented a variety of crisis

management programs. Banks were given access to funds through several programs: increased access to the

Troubled Asset Relief Program (TARP), Discount Window, Term Auction Facility, Asset-Backed Commercial

Paper Money Market Mutual Fund Liquidity Facility, Primary Dealer Credit Facility, and Commercial Paper

Funding Facility.

5

See Allen et al. (2014) for a more extensive discussion.

6

A more precise analysis would involve risk-weighted assets and equity capital levels. Unfortunately, this

level of detail is not reported in the available data sources.

390 The Journal of Financial Research