December 2009
International Department
Satoe Aoki, Tatsuya Hasegawa and Shingo Watanabe

Click on rev09e06.pdf to download the full text.

This paper studies supply and demand factors that explain the recent decline in bank lending growth in the U.S. and Europe. During 2008, bank lending growth in the U.S. and Europe declined while lending rates remained relatively constant. This phenomenon was also observed in Japan during the financial crisis in the late 1990s, suggesting a negative feedback loop between the real economy and the financial sector, where banks' lending supply and private sector's borrowing demand decrease simultaneously. On the other hand, U.S. and European banks' lending rates started to ease in early 2009, thanks to financial sector support programs and abundant liquidity from central banks, but the growth of lending continued to decelerate. This situation indicates that banks have tightened their credit standards to a smaller extent than in 2008 and that the current deceleration in bank lending is caused mainly by decreased demand for borrowing from the non-financial private sector, which still suffers from excessive indebtedness. The experience of Japan in the post-bubble period suggests a risk that U.S. and European bank lending will not effectively transmit desired effects of looser monetary policy as long as the non-financial private sector keeps downsizing its balance sheet. Moreover, U.S. and European banks may again tighten lending standards to a large extent and decrease their loan supply if the real economy re-enters a slump.

Notice

Bank of Japan Review is published by the Bank of Japan to explain recent economic and financial topics for a wide range of readers. This report, 2009-E-6, is a translation of the original Japanese version, 2009-J-14 published in October 2009. The views expressed in the Review are those of the authors and do not necessarily represent those of the Bank of Japan.

If you have comments and questions as well as requests for hard copies, please contact Shingo Watanabe, Director, International Department (E-mail : shingo.watanabe@boj.or.jp).