Bank Lending and Credit Supply Shocks

Abstract

The turmoil that raged in the global financial markets during the 2007–09 crisis left a significant imprint on bank lending over the past several years. The successive waves of turbulence that ripped through the financial system during that period exerted substantial pressure on both the asset and liability sides of banks’ balance sheets, and banks, at the height of the crisis in the latter part of 2008, faced funding markets that were largely illiquid and secondary markets that were essentially closed to sales of certain types of loans and securities. Together with the slowdown in economic activity that emerged at the end of 2007 and accelerated appreciably in latter part of 2008, these financial disruptions led banks to become significantly more cautious in the extension of credit and to take steps to bolster their capital and liquidity positions. Moreover, the persistent tightness of credit conditions faced by many borrowers, in combination with generally weak demand for bank-intermediated credit, have continued to affect lending during the sluggish recovery. Indeed, two years after the official end of the recession, core loans outstanding — the sum of bank loans to households and nonfinancial businesses — remain 13 per cent below the level reached during the cyclical peak in December 2007.1