Six Causes of the Credit Crunch

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Robert T. Clair Senior Economist and Policy Advisor Federal Reserve Bank of Dallas Paula Tucker1 Student University of Texas at Austin Law School Six Causes of the Credit Crunch (Or, Why Is It So Hard to Get a Loan?) M any bankers, legislators, borrowers, and regulators have expressed their views about the cause of the credit crunch. Like the blind men examining an elephant, each has an opinion that has been formed from his perspective. Each has characterized the problem and potential solutions differently. None are completely correct or completely wrong. Bankers cite the lack of high quality loan demand. Legislators blame overzealous regulators. Borrowers say banks are too conservative. Regulators encourage bankers to lend and tell their examination staffs to facilitate the extension of credit but maintain the safety and soundness of the banking system. Many economists studying the credit crunch explain it as a cyclical decline in credit demand. They often suggest that the cyclical swing is reinforced by structural changes in the demand for credit. These economists have minimized the numerous important factors that have reduced the ability of banks to supply credit or, at a minimum, have increased the cost of providing it. In this article, we view credit crunches as localized events that occur at different times in different parts of the country. The Texas banking industry provides an important case study. The causes of the Texas credit crunch are highly similar to the causes of credit crunches that have developed elsewhere in the country. We focus on the past seven years because the contraction of bank credit began in Texas in 1986. While demand may play an important part in the decline in loans outstanding during some of this period, we focus on the factors affecting the supply of loans from banks over the past seven years. While there are other

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