There was a paper in October 2008 by Minneapolis Fed Economists which said bank lending has not declined and has infact increased. This created quite a stir as all along we have been expecting it to be opposite. They look at 4 supposed to be facts right now and say they are myths instead:
Bank lending to nonfinancial corporations and individuals has declined sharply.
Interbank lending is essentially nonexistent.
Commercial paper issuance by nonfinancial corporations has declined sharply, and rates have risen to unprecedented levels.
- Banks play a large role in channeling funds from savers to borrowers.
Boston Fed paper provides more disaggregated data compared to Minneapolis Fed paper and shows that first three are reality and not myths. On fourth, they say more analysis is needed.
The second paper by Ivashina provides further analysis:
Fact 1: New lending in 2008 was significantly below new lending in 2007, even before the peak period of the financial crisis (August-October 2008)
Fact 2: The decline in new loans accelerated during the financial crisis, falling by 36% in the August-October 2008 period relative to the prior three-month period.
Fact 3: Real investment loans (working capital or general corporate purposes) and restructuring loans (those for M&A, LBOs, and stock repurchases) have decreased to a similar extent.
Fact 4: During the peak period of the financial crisis (August-October 2008), noninvestment- grade loans fell by 50% relative to the prior period, while investment grade loans fell by 19%.
However, Ivashina provides a caveat which is quite interesting and is a further scope for research:
New lending has declined during the financial crisis. However, it remains unclear whether this decline is supply or demand driven. Are banks withholding funding from creditworthy borrowers who need financing? Or are firms cutting investment in response to concerns about the economy, and thus choosing not to borrow?
To address this issue, we are investigating the differences in the way banks have responded to the financial crisis. Have banks with more impaired loan portfolios scaled back their lending more? Likewise, have banks with a larger revolver overhang cut their lending more to protect themselves against the risk of large revolver drawdowns? And, how have banks responded to the credit guarantees and equity infusions that the U.S. government has recently provided?
Loads of research expected on the issue and is going to be very interesting.