U.S. Bank Behavior in the Wake of the 2007–2009 Financial Crisis
IMF Working Papers, May 1, 2010
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- U.S. Bank Behavior in the Wake of the 2007–2009 Financial Crisis
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Bibliographic details
- Authors: Dalia S Hakura, Ralph Chami, Thomas F. Cosimano, Adolfo Barajas
- Published: May 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455201143.001
Summary and Key Findings
- Study period: 2007Q3 - 2009Q2.
- Primary research questions:
- Whether capital or liquidity was the binding constraint on lending.
- Factors influencing banks’ decision to hold capital.
- Banks’ pricing behavior during the episode.
- Main findings:
- Capital, rather than liquidity, constrained lending.
- Banks increased capital by slowing lending and raising profit margins.
- Banks did not fully pass through the Federal Reserve’s interest rate cuts to borrowers.
- Banks optimally choose capital based on the expected future demand for loans and the marginal cost of capital.
Data and Methodology
- Data frequency: quarterly.
- Sample: largest U.S. banks (quarterly data for the largest U.S. banks).
- Empirical focus: disentangling capital versus liquidity constraints, determinants of capital holdings, and loan pricing responses.
Policy-Relevant Implications and Behavioral Mechanisms
- Behavior under stress:
- Lending contraction was driven by capital considerations.
- Banks adjusted lending supply and loan pricing to rebuild or preserve capital.
- Pricing behavior:
- Evidence of incomplete pass-through of Federal Reserve interest rate cuts, implying elevated lender margins during the crisis period.
- Capital policy considerations:
- Optimal capital choices are forward-looking—dependent on expected future loan demand and marginal cost of capital—suggesting that regulatory design and crisis interventions should account for forward-looking bank responses.
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