William F. Bassett

Changes in Bank Lending Standards and the Macroeconomy

Identifying macroeconomic effects of credit shocks is difficult because many of the same factors that influence the supply of loans also affect the demand for credit. Using bank-level responses to the Federal Reserves Loan Officer Opinion Survey, we construct a new credit supply indicator: changes in lending standards, adjusted for the macroeconomic and bank-specific factors that also affect loan demand. Tightening shocks to this credit supply indicator lead to a substantial decline in output and the capacity of businesses and households to borrow from banks, as well as to a widening of credit spreads and an easing of monetary policy.

What Drives the Persistent Competitiveness of Small Banks

Several trends in the financial industry could have weakened the competitiveness of small banks in recent years. Despite those challenges, small banks have grown more rapidly than larger banks over the period from 1985 to 2001, and their profitability has been sustained at high levels. However, small banks have needed to increase the interest rates offered on deposit accounts in order to attract progressively more deposit funding. In this paper, we provide empirical evidence that this increased interest cost primarily reflects the high rate of return that small banks were able to earn on their assets. Moreover, we show with an arbitrage model that the decline in the real value of deposit insurance has only a small effect on deposit rates as long as bank failure rates are in the low range of recent years.

Estimating Changes in Supervisory Standards and Their Economic Effects

The disappointingly slow recovery in the U.S. from the depths of the financial crisis once again focused attention on the relationship between financial frictions and economic growth. Some bankers and borrowers suggested that unnecessarily tight supervisory policies were a constraint on new lending that hindered the recovery. This paper explores one aspect of supervisory policy: whether the standards used to assign commercial bank CAMELS ratings have changed materially over time (1991–2013). Models incorporating time-varying parameters or economy-wide variables suggest that standards used in the assignment of CAMELS ratings over the post-crisis period generally were in line with historical experience. Indeed, each of the models used suggests that the variation in supervisory standards has been relatively small in absolute terms over most of the sample period. However, we show that when this measure of supervisory stringency becomes elevated, it has a noticeable dampening effect on lending activity in subsequent quarters.

Government Support of Banks and Bank Lending

The extraordinary steps taken by governments during the 2007-2009 financial crisis to prevent the failure of large financial institutions and support credit availability have invited heated debate. This paper comprehensively reviews empirical assessments of the benefits of those programs—such as their effectiveness in reducing bank failures or supporting new lending—introduces a combined dataset of five key programs that provided term debt or equity to banks in the U.S., and assesses the effects of such support on lending by U.S. banks. The results, using an instrumental variable approach, suggest that bank loans did not increase at institutions receiving government support.

Medicaid's Nursing Home Coverage and Asset Transfers

Medicaid covers the costs of a long nursing home stay. This coverage may create an incentive for the elderly to transfer their assets to their children to qualify for Medicaid before entering a nursing home. Previous researchers had found little evidence that such behavior was widespread or that asset transfers were large. However, data from the Study of Asset and Health Dynamics Among the Oldest Old (AHEAD) suggest that the self-assessed probability of entering a nursing home is a significant determinant of the likelihood of making an asset transfer. The budgetary implications of these Medicaid-induced asset transfers were probably fairly small at the time of the study, but not insignificant, and are likely to have risen steadily since.

Assessing Targeted Macroprudential Financial Regulation: The Case of the 2006 Commercial Real Estate Guidance for Banks

In January 2006, federal regulators issued guidance requiring banks with specific high concentrations of commercial real estate (CRE) loans to tighten managerial controls. This paper shows that banks with concentrations in excess of the thresholds set in the guidance subsequently experienced slower growth in their CRE portfolios than can be explained by changes in bank or economic conditions. Moreover, banks above the CRE thresholds tended to have slower commercial and industrial loan growth but faster household loan growth following issuance of the guidance. The results highlight the potentially broad influence that portfolio-based macroprudential regulation might have on bank behavior.