The institutional memory hypothesis and the procyclicality of bank lending behavior

By Allen N. Berger, Greg Udell. 2002

644 citations recorded by the source corpus.

Abstract We test a new hypothesis that may help explain the procyclicality of bank lending. The institutional memory hypothesis is driven by deterioration in the ability of loan officers over the bank's lending cycle that results in an easing of credit standards. We test this hypothesis using data from individual US banks over 1980–2000: over 200,000 bank-level observations on commercial loan growth, over 2,000,000 loan-level observations on interest rate premiums, and over 2000 bank-level observations on credit standards and loan spreads from bank management survey responses. The empirical analysis supports the hypothesis, although there are differences by bank size class.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/e00416e00971589da871fd2e4481d5942db42f58

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Citations in the corpus

Commercial property prices and bank performance (2004, background): “…tendency towards “disaster myopia” can be attributable inter alia to inadequate data, poor risk management, pervasive incentives linked to the safety net, or intensified competition following the liberalisation of the banking sector or institutional memory loss over time (Berger and Udell (2003)).”
Bank Competition and Credit Standards (2004, background): “Berger and Udell (2003) propose that countercyclical credit standards may result from the gradual deterioration of the banks’ ability to identify potential borrower problems.”
Credit Risk Drivers: Evaluating the Contribution of Firm Level Information and of Macroeconomic Dynamics (2009, neutral): “(2000), Kent and D’Arcy (2001), Lowe (2002), Berger and Udell (2003), Carling et al.”
Banks’ procyclical behavior: Does provisioning matter? (2008, background): “Several other banks behaviors for example, disaster myopia (Guttentag and Herring, 1986), herd behavior (Rajan, 1994) or the institutional memory hypothesis (Berger and Udell, 2003) are more frequently highlighted to explain credit risk misevaluation and the credit cycle.”
Portfolio and Financing Adjustments for U.S. Banks: Some Empirical Evidence (2008, neutral): “A sample of this large literature on the regulatory induced procyclicality of bank lending and its relevance for the real economy includes Bernanke and Lown (1991), Lang and Nakamura (1995), Berger and Udell (1994), Hancock and Wilcox (1994), Peek and Rosengren (1995), Shrieves and Dahl (1995), Stan”
Cross-Border Banking and the International Transmission of Financial Distress During the Crisis of 2007-2008 (2010, background): “Yijkt = 1 Xijkt + 2 Post Financejkt Foreignjkt + 3 Post+ 4 Finance+ + 5 Foreignjkt + 6 Dk + "ijkt (5)”
The Impact of Supply Constraints on Bank Lending in the Euro Area - Crisis Induced Crunching? (2010, background): “Berger and Udell (2004) applied bank-level information of US banks’ lending standards in a study providing evidence of myopic behaviour of bank loan officers as an explanation for the observed pro-cyclicality of bank lending.”
Relationship and Transaction Lending in a Crisis (2013, neutral): “To make the empirical part closer to the theoretical onet we have therefore estimated equation (11)-(13) on a subset of around 6,000 new rms , that entered the credit register in the period 2005:Q2:2007:Q2.”
Cross-border banking, credit access, and the financial crisis (2012, background): “Our finding that riskier borrowers are more affected might even suggest a link to the institutional memory explanations of pro-cyclical lending behavior (e.g., Berger and Udell (2004)) where eroded lending expertise is more problematic at foreign banks.”