Macroeconomic Implications of Bank Loan Commitments

Abstract

This paper analyzes how bank loan commitments affect loan supply and macroeconomic volatility. Using testable implications derived from a model in which a bank faces stochastic loan commitment takedown, our bank-level empirical test provides evidence that when financial markets get tighter, increased loan takedown crowds out loans made without commitment, implying asymmetric effects depending on the relative access to loan commitments and ordinary term loans. At the state level, we find macroeconomic volatility tends to rise as market-wide liquidity dries up and loan commitments tend to stabilize the economy by partially offsetting negative liquidity shocks. This evidence adds support to the financial market explanation for the causes of increased stability of the U.S. economy from the early 1980s.

Keywords: loan commitments, bank lending, business cycles

JEL Classification: E40 E44 G21