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Why Bank Credit Policies Fluctuate: A Theory and Some Evidence
Abstract
In a rational profit-maximizing world, banks should msdntain a credit policy of lending if and only if borrowers have positive net present value projects. Why then are changes in credit policy seemingly correlated with changes in the condition of those demanding credit? This paper argues that rational bank managers with short horizons will set credit policies that influence and are influenced by other banks and demand side conditions. This leads to a theory of low frequency business cycles driven by bank credit policies. Evidence from the banking crisis in New England in the early 1990s is consistent with the assumptions and predictions of the theory.
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Cited by
The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle
Acharya, V., & Naqvi, H. (2012) · Journal of Financial Economics · doi:10.1016/j.jfineco.2012.05.014 · Cited by 650
Capital Requirements, Monetary Policy, and Aggregate Bank Lending: Theory and Empirical Evidence
THAKOR, A. V. (1996) · The Journal of Finance · doi:10.1111/j.1540-6261.1996.tb05210.x · Cited by 586
The institutional memory hypothesis and the procyclicality of bank lending behavior
Berger, A. N., & Udell, G. F. (2004) · Journal of Financial Intermediation · doi:10.1016/j.jfi.2004.06.006 · Cited by 580
Does bank FinTech reduce credit risk? Evidence from China
Cheng, M., & Qu, Y. (2020) · Pacific-Basin Finance Journal · doi:10.1016/j.pacfin.2020.101398 · Cited by 498
Gorton, G., & Winton, A. (2003) · Handbook of the Economics of Finance · doi:10.1016/s1574-0102(03)01012-4 · Cited by 304
Metadata
- Authors
- Rajan, R. G.
- Venue
- The Quarterly Journal of Economics
- Publisher
- Oxford University Press (OUP)
- Published
- 1994-05-01
- Volume
- 109
- Issue
- 2
- Pages
- 399-441
- ISSN
- 0033-5533 (ISSN-L)
- 1531-4650
- OpenAlex
- W2100670087
- Cited by
- 806
- References
- 0
- FWCI
- 3.68
- Type
- journal article
- Language
- en
- Open access
- closed
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- Rajan, R. G. (1994). Why Bank Credit Policies Fluctuate: A Theory and Some Evidence. The Quarterly Journal of Economics. https://doi.org/10.2307/2118468
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Contains information from the Semantic Scholar Academic Graph Datasets, made available under the ODC Attribution License (ODC-BY 1.0).
Semantic Scholar’s data is described in: Kinney, R., et al. (2023). The Semantic Scholar Open Data Platform. arXiv:2301.10140.
