Demand and supply side determinants of commercial and industrial loan volume.

Abstract

Commercial loan volume in the United States is a function of loan demand by businesses and loan supply from banks. The purpose of this dissertation is to identify those factors that determine commercial credit on the supply side and to clearly separate them from demand-side factors. In particular, the dissertation posits that banks tighten or ease credit extension in response to changes in the rate of return on their assets, most of which consist of loans, and perceived economic uncertainty as measured by volatility in the federal funds rate. The return on banks' assets, in turn, are driven by central bank actions, such as changes in reserve requirements and interest rates, by regulatory changes, and by changes that typically occur over the course of the business cycle. The demand-side determinants of bank commercial and industrial lending are dominated by non-bank firms' return on equity and the relative price of bank loans to funds raised in the capital market.

The study's results are largely consistent with the New Keynesian literature on the bank lending channel and the role of imperfect information in the credit market. This study utilizes quarterly data, covering the period 1984 to 2000. The empirical methodology relies on structural time series modeling.