The dramatic increase in depository institution (DIs) failures in the middle and late 1980s stemming from banking deregulations in 1980s raised concerns about banks insolvency risk and in the policy means to control this risk. The risk-based capital (RBC) requirements as a support to the Basel I replaced capital guidelines for US banks to hold a greater proportion of bank equity against assets deemed high risk. The risk facing DIs was important for policymakers because of the perceived link between their stability and the performance of the economy. The implementation of the RBC requirements saw a big shift in banking lending practices, DIs moved away from high-risk commercial loans to treasuries making it difficult for commercial borrowers to obtain credit while other sources of credit became costly causing economic slowdown. Thus, RBC may have contributed to a “credit crunch” which is defined as big reduction in the extension of credit available to commercial borrowers (Berger and Udell, 1991).
This paper seeks to determine, using state-level data, whether the precipitous drop in equilibrium loan amount in early 1990s, resulted from demand driven factors, or supply driven factors or both, for 1979 to 1996 period and how the regulatory changes impact the equilibrium loan amount. Existing empirical works by Bernanke and Lown (1991), Berger and Udell (1994), Brinkmann and Horvitz (1995), and Peek and Rosengren (1995) and others address the credit crunch issue in other ways.
Rheumatoid arthritis is a disease in which the body'simmunesystem attacks the lining of the joints. Usually, the joints of the hands and feet are affected first. Joints will become swollen, stiff and painful. There is no cure for RA at present, so treatments aim to relieve pain and stiffness, and improve the ability to move.
There is considerable empirical evidence that both individual consumers and larger entities such as countries bear more idiosyncratic risk than is consistent with complete and frictionless Arrow-Debreu markets. Evidence at the level of the individual consumer is discussed, for example, in Hayashi [1985] and Zeldes [1989], who show that individual consumption is poorly correlated with aggregate consumption. Evidence at the international level is discussed, for example, in Backus, Kehoe, and Kydland [1992], who point out the low correlation between consumption levels across countries.
That individuals bear idiosyncratic risk can be captured by many departures from the Arrow-Debreu framework. Three important examples of such models are incomplete market models, where there are not enough securities to insure against all events; models of liquidity constraints in which individual consumers are assumed unable to borrow as much as they would like in loan markets; and models of adverse selection and moral hazard. Incomplete market models are discussed by Radner [1972], Hart [1975], and Duffie and Shafer [1985], for example. Examples of models of liquidity constraints can be found in Bewley [1980], Dumas [1980], Townsend [1980], Scheinkman and Weiss [1986], Abel [1990], Kehoe, Levine, and Woodford [1992] and Heaton and Lucas [1997]. Models of liquidity constraints typically involve incomplete markets, as not only are there short sales constraints on securities, but securities are limited in number as well. These papers have largely focused on the computation of special types of equilibria in economies where the outside asset is a fiat money of no intrinsic value. In these equilibria shocks have long term consequences. We show that this is also the case in the incomplete market model considered in this paper.
