Working Paper

The capital crunch: neither a borrower nor a lender be

Abstract: The dramatic reduction in the growth rate of bank lending associated with the 1990-91 recession, particularly in New England, has evoked claims by many observers of a credit crunch. However, because of the difficulty in determining whether the observed slow credit growth is a demand or supply phenomenon, convincing evidence of the practical importance of credit crunches for economic activity remains elusive. We overcome this obstacle by examining a cross-section of banks in New England that have experienced the same economic downturn, effectively controlling for changes in demand. We find empirical support for a capital crunch, whereby poorly capitalized institutions shrink to satisfy capital requirements. This alone is not a sufficient condition for a credit crunch. However, we find s6me additional evidence that the capital crunch may have limited credit availability in New England.

Status: Published in Journal of Money, Credit and Banking 27, no. 3 (August 1995): 625-38.

Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: Working Papers

Publication Date: 1991

Number: 91-4