The Capital Crunch: Neither A Borrower Nor A Lender Be

The dramatic reduction in the growth rate of bank lending associated with the 1990-91 recession, particularly in New England that has evoked claims by many observers of a credit crunch. However because of the difficulty in determining whether the observed slow credit growth is a demand or supply for economic activity remains elusive. We overcome this obstacle by examining a cross section of banks in New England that have experienced the same economic downturn, effectively controlling for changes in demand. We find empirical support for a capital crunch, where by poorly capitalized institutions shrink to satisfy capital requirements.