Weakly capitalized banks slowed overall lending as recovery unfolded, says Dallas Fed's Economic Letter

For immediate release: January 13, 2014

DALLAS—The Federal Reserve’s monetary easing during the Great Recession would have more effectively supported the economy if the most-leveraged banks had held more capital, according to the latest issue of the Federal Reserve Bank of Dallas’ Economic Letter.

In “Weakly Capitalized Banks Slowed Lending Recovery After Recession,” J.B. Cooke and Christoffer Koch find that large, highly leveraged banks and thrifts followed a softer lending growth path than their better-capitalized counterparts in 2009–10 during the sluggish recovery from the Great Recession.

If lending at the least-capitalized banks had grown at the same rate it did at the other 90 percent of commercial banks, the cumulative amount of loan activity might have been 5.8 percent higher during the period, according to the authors’ analysis.

In the past couple of years, lending growth at the least-capitalized banks has slowly picked up, a positive note for the economy and financial system, Cooke and Koch state.

“This growth signals not only that the U.S. economy is continuing to rebound from the Great Recession and financial crisis, but also that some of the weaker links in the financial system are on their way to recovery,” the authors write.

Cooke is an economic programmer and analyst and Koch is a research economist at the Federal Reserve Bank of Dallas.

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