U.S. Bank Behavior in the Wake of the 2007-2009 Financial Crisis

Dalia Hakura, Ralph Chami, Thomas F. Cosimano, Adolfo Barajas
2010 IMF Working Papers  
This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. The paper examines the slowdown of lending by large U.S. banks over the period 2007Q3 -2009Q2, focusing on: (i) whether capital or liquidity was the binding
more » ... the binding constraint; (ii) factors influencing banks' decision to hold capital; and (iii) their pricing behavior. Using quarterly data for the largest U.S. banks, the paper finds that capital, rather than liquidity, constrained lending. Banks took actions to increase capital by slowing lending and raising profit margins, not fully passing through the Federal Reserve's interest rate cuts. Banks optimally choose capital based on the expected future demand for loans and the marginal cost of capital. JEL Classification Numbers: E5, G2
doi:10.5089/9781455201143.001 fatcat:wdurfvt2yregvg7tyfvlaep4au