Abstract

The Great Recession was a hard time for many American families and had a lasting effect on the entire world. If we are not careful, our post pandemic society could be heading down a similar path. With banks starting to need help from the government again in 2023, I fear they have not learned from previous mistakes. With this research, I hope to understand how the banks engaged in risky lending prior to the Great Recession and if it was due to the lower interest rates given from the Federal Government. I would also like to dive into the banks’ lending activities post-recession as well to see how they may have changed. To start this research, I gathered information from different pieces of literature.

The goal of this research was to get a better understanding of 4 important principals that effect bank lending decisions. The first was to look into how banks respond to the changes of interest rates, how they are affected. The second was to look into how and why consumers change their consumption preferences when rates are changed. The next piece was used to gather information on how exactly banks make their profit. The fourth and final principal I needed to understand was the credit channel. This was used to understand the frictions that arise with monetary policy transmission, better known as interest rate changes. I used this information to create a model to test the acceptance rates of loans from banks before and during the recession. I was able to do this by constructing a 14-year panel dataset that included many different variables. The dependent variable was loan acceptance rate, and the key independent variable was per capita personal income and per capita GDP. I used income and GDP as a way to keep track of changes in interest rates. I ran a total of 6 separate regressions, 4 of these regressions are indifference in indifferences. The 4 indifference in indifferences are comparing low income/GDP MSAs to high income/GDP MSAs. The first 2 compare the years 2001/04 to 2005/08 and another two compare the years 2001/04 to 2009/14. This is because I am comparing pre regression to during regression, as well as pre regression to post regression. This was in hopes of seeing how bank lending standards changed from before during and after the regression. The final 2 regressions use income and GDP as a whole rather than splitting it into two different group of high and low.

The results of these regressions show that people who are from low income and low GDP were more likely to receive loans in the years 2001/04 when compared to 2005/08. The results also shows that people were more likely to receive loans after the recession than prior to the recession. Overall, when interest rates were held low, there was a higher chance of a riskier borrow to receive a loan than compared to someone who was in a wealthy area that have a higher income.

Advisor

Chaudhary, Sookti

Department

Business Economics

Disciplines

Real Estate

Publication Date

2023

Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis

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© Copyright 2023 Andrew David Yanssens