Bank Management White Papers
Credit Crunch, Bank Lending, and Monetary Policy: A Model of Financial Intermediation with Heterogeneous Projects
Overview A credit crunch is generally defined as a decline in the supply of credit because, although banks are less willing to lend, lending rates do not rise. According to Green and Oh (1991), a credit crunch is an inefficient situation in which credit-worthy borrowers cannot obtain credit at all, or cannot get it at reasonable terms, and lenders show excessive caution, which may or may not be traceable to regulatory distortion, leaving would-be borrowers unable to fund their investment projects. A credit crunch can have several causes, such as regulatory pressures and over-reaction to deteriorating bank asset values and profitability. If regulatory pressure is the obstacle to credit growth, it should be removed, and credit growth can be restored. But if the crunch is caused by inefficient conservative lending by banks, it is an open question whether easing monetary policy can help. This paper attempts to develop a quantitative model to address the issue.
| Publisher | Bank of Canada | File Format | PDF, requires Acrobat Rdr 5 |
|---|---|---|---|
| Date Published | August 2003 | Downloads | 57 |
| Format | White Papers | ||
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