Board of Governors of the Federal Reserve System

October 2013

Changes in Bank Lending Standards and the Macroeconomy

William F. Bassett, Mary Beth Chosak, John C. Driscoll, and Egon Zakrajsek

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.

Keywords: Credit supply disruptions, bank lending policies, credit crunch

PDF: Full Paper