Bank Credit Standards

Mitchell Berlin

Vice President and Economist

Q2 2009

Business Review — Banks’ lending standards at times seem too stringent and at other times too lax. The pattern seems to indicate that banks lend more easily in good times but tighten credit standards in lean times.

But such a lending pattern may also be attributable to changes in borrowers’ default risk over the business cycle or changes in the demand for loans, which rises and falls with GDP. Is there a systematic reason why banks might be too lax or too stringent in their lending? Economists have proposed a number of models to explain a bank lending cycle, including changes in bank capital, competition, or herding behavior. In this article, Mitchell Berlin discusses these models and the empirical evidence for each.

This article appeared in the Second Quarter 2009 edition of Business Review.

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