Federal Reserve Bank of New York The Credit Crunch

ACCORDING TO many popular accounts, the severity of the recession that began in July 1990 was worsened by financial distress-or, at least, by financial discomfort-in a number of sectors of the economy. Much of this discussion centered on the so-called "credit crunch " in the bank-ing sector. ' As early as the spring of 1990, some months before the reces-sion began, there were newspaper reports (mostly anecdotal) of banks cutting back on lending, sometimes with deleterious effects on retailers and other bank borrowers. In June the secretary of commerce called the credit crunch a serious problem,2 and congressional hearings on the is-sue were held during the summer. As the recession arrived in July and then deepened during the fall, the view that a credit crunch was playing at least some role in the downturn became increasingly widespread among policymakers, including some at the Federal Reserve. Despite these developments, there was, and still is, a notable lack of consensus about the importance of a credit crunch in the banking sector, its causes, and even the meaning of the term. Although it is too early to We would like to thank Joseph Baggett, Serena Ng, and James Ryu for assistance and a number of our colleagues for assistance with data and useful suggestions. Particularly helpful comments came from David Wilcox and our discussant, Benjamin Friedman. The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System. 1. Some commentators have raised the possibility of a generalized credit crunch af-fecting all credit sources, not just banking. We briefly discuss this possibility below, but our paper focuses on the banking sector