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The institutional memory hypothesis and the procyclicality of bank lending behavior

Allen Berger () and Gregory Udell ()

No 2003-02, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Stylized facts suggest that bank lending behavior is highly procyclical. We offer a new hypothesis that may help explain why this occurs. The institutional memory hypothesis is driven by deterioration in the ability of loan officers over the bank's lending cycle that results in an easing of credit standards. This easing of standards may be compounded by simultaneous deterioration in the capacity of bank management to discipline its loan officers and reduction in the capacities of external stakeholders to discipline bank management. We test the empirical implications of this hypothesis using data from individual U.S. banks over the period 1980-2000. We employ over 200,000 observations on commercial loan growth measured at the bank level, over 2,000,000 observations on interest rate premiums on individual loans, and over 2,000 observations on credit standards and bank-level loan spreads from bank management survey responses. The empirical analysis provides support for the hypothesis.

Keywords: Bank loans; Business cycles (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-fin and nep-mac
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Journal Article: The institutional memory hypothesis and the procyclicality of bank lending behavior (2004) Downloads
Working Paper: The institutional memory hypothesis and the procyclicality of bank lending behaviour (2003) Downloads
Working Paper: The institutional memory hypothesis and the procyclicality on bank lending behavior (2003)
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