[Chari, Chistiano and Kehoe (2008), cited in the quoted passage, is the Minneapolis Fed paper]
Bank Lending During the Financial Crisis of 2008
Victoria Ivashina Harvard Business School
David S. Scharfstein Harvard Business School; National Bureau of Economic Research (NBER)
December 15, 2008
Abstract: This paper documents that new loans to large borrowers fell by 37% during the peak period of the financial crisis (September-November 2008) relative to the prior three-month period and by 68% relative to the peak of the credit boom (Mar-May 2007). New lending for real investment (such as capital expenditures) fell to the same extent as new lending for restructuring (LBOs, M&A, share repurchases). Banks that have access to deposit financing cut their lending less than banks with less access to deposit financing. In addition, there is a large overhang of revolving credit facilities, which may also have curtailed lending. We document an increase in drawdowns of revolving credit facilities. Many of these drawdowns were undertaken by low credit quality firms concerned about their access to funding. While helpful to these borrowers, they may limit the ability of banks to make other loans. Banks with more revolving lines outstanding relative to deposits reduced their lending more than those with less revolving line exposure.
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[from the paper]
Our finding of a decline in lending is ostensibly at odds with Chari, Chistiano and Kehoe (2008) who document that commercial and industrial (C&I) loans reported on the balance sheet of U.S. banks rose by about $100 billion from September to mid-October, 2008. However, their finding can be reconciled with ours if the rise in C&I loans on bank balance sheets reflects an increase in drawdowns of existing revolving credit facilities. Indeed, we document that this was likely the case.
From news accounts alone, we are able to document $16 billion of credit line drawdowns (Table II), which would account for approximately 15.5% of the increase in C&I loans reported on bank balance sheets. In almost all instances, the firms state that they are drawing on their credit lines because of concerns about the financial markets. Thus, these drawdowns are likely to be crisis-related, not drawdowns for usual business purposes. Given our estimate of roughly $3,500 billion in outstanding revolving credit lines, the drawdowns were likely much larger than what we find in news reports.