Article

Journal of Financial Services Research

, Volume 9, Issue 1, pp 5-30

Regulation, recession, and bank lending behavior: The 1990 credit crunch

  • Ronald E. ShrievesAffiliated withFinance Department, University of Tennessee
  • , Drew DahlAffiliated withDepartment of Business Administration, Utah State University

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Abstract

This article utilizes a pooled time-series and cross-section sample of banks to investigate the causes of the credit contraction which occurred during the 1990–1991 period. The methodology involves an econometric model which recognizes that banks' decisions regarding lending and capital are simultaneously determined. Bank lending behavior is modeled as being determined by a combination of economic conditions, loan quality problems, and capital growth. The results of the econometric tests are consistent with a multiplicity of factors contributing to the reduction in lending. The evidence suggests that the credit contraction of 1990–1991 cannot be explained solely as a result of recession and low capital levels. Changes in the supervisory climate and in bank capital regulation, perhaps coupled with independent changes in bankers' assessments of the risk climate, were likely responsible for a substantial part of the credit contraction.