infonet-economy

We use individual U.S. commercial bank balance sheet information to develop stylized
facts about bank behavior in both the cross section and over time. We then build a quant-
itative model of bank behavior taking as exogenous inputs the aggregate and idiosyncratic
components of problem loans, interest rate spreads and deposit shocks, seeking to under-
stand decisions regarding new loans provision, access to wholesale funding and defaults. The
model generates highly procyclical loan supply and banks can curtail new lending very ag-
gressively in response to background risk shocks, such as an increase in bad loans. Bank
failures, though, are strongly countercyclical. Relative to a baseline recession, in a reces-
sion simultaneously accompanied by a temporary freeze in the money market, bank defaults
increase by a factor of three and credit supply drops by 2.5 percentage points more.