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I am interested specifically in whether banks are more, less or just as willing to lend money during financial crises.

Google doesn't seem to return an exact answer to this question and going over articles like this one I get the impression that banks are a lot less willing to lend money during financial crises, but I am not sure I understand the subject enough to draw conclusions of my own.

Bogdan Ionică
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  • Thinking back to 2008, it was (and still is) my impression that banks were losing so much money on defaults that they restricted loans so that they wouldn't lose any more. That might be a faulty assumption, though. – RonJohn Feb 24 '20 at 09:47
  • 2008 was known as the Global Financial Crisis. Bank loans were down sharply, with varying effects on different types of loans (home, commercial, etc.). Bear in mind that part of this was due to diminished economic growth and increased unemployment. – Bob Baerker Feb 24 '20 at 16:03
  • Bear in mind that part of this was due to diminished economic growth and increased unemployment. That's a valuable point. You can't look at originations as an indicator of a bank's "willingness" to lend, since originations takes the borrower into account too - A bank may really want to write more loans, but they can't if no one wants them (or no one qualifies). – dwizum Feb 24 '20 at 16:06
  • Your question is really generic and high level, so I've written a very generic and high level answer. If you can hone in on specific factors or scenarios you're interested in, I can edit the answer to be more specific (and/or you may be more likely to attract other answers). – dwizum Feb 24 '20 at 16:32
  • @dwizum Your answer was exactly what I was looking for so I went ahead and accepted it. Thanks! – Bogdan Ionică Feb 24 '20 at 16:36
  • Glad to hear it was helpful. Keep in mind that there are often entire teams of analysts at a given bank trying to answer the details of this question, it's a subject that is incredibly deep and broad, and once you're down past the surface level there isn't a lot you can take for granted. – dwizum Feb 24 '20 at 16:43

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A financial crisis can have a lot of impact on lending, in many different ways. Right now, It's not super clear what your understanding of lending (in general) is, or exactly what factors you're interested in. Talking about a bank's "willingness" to lend is somewhat abstract. Banks are generally always in the business of being willing to lend money, but how and when and under what terms may change over time. It might be more appropriate to focus on how a bank makes decisions about the following:

  • loan features (interest rate, term, etc). Interest rates are based on risk. If a bank expects a lot of defaults, they will typically raise rates.
  • which products to offer (should a bank offer adjustable rate mortgages, or just fixed rate?) Banks may aggressively promote certain products based on what triggered the crisis.
  • who to lend to (obvious things like, only lend to A or B paper, but also less obvious things like, don't write HELOCs or home equity loans in second position behind someone else's loan, only write them behind our own loans). During or immediately after a crisis, a bank may be less likely to write a loan behind another lender.
  • how to manage the lending portfolio after the loans are written (should we keep these loans, or sell them? Which loans should we sell, under what terms, to whom? When we sell loans, do we continue to operate them, and do we keep any of the risk?) Portfolio management is an important variable for banks when they expect the financial environment to change. Depending on the trigger, they may decide to buy or sell more of a specific type of loan, or loans to specific types of consumers.

Timing of a crisis is important in these decisions. If a lender suspects a crisis is coming, they may make one set of decisions. But, in the middle of, or after, an obvious crisis, they may make different decisions. Unfortunately, crises really only happen when not everyone expects them, so it's hard to pick out a generic, coherent answer to your question if you're thinking about the "ahead of time" aspect.

There's also a big factor in terms of regulation. To a large extent, for real estate loans, lending is regulated to the point that the federal government is impacting who gets loans, and how much banks are able to lend. So, even if a bank "wants" to write loans, the government plays an important role in deciding if they are able to or not. Typically, in the years after a crisis, a slew of regulations will emerge based on trying to target what the perceived cause of the crisis was.

And of course, there's also consumer behavior. People will behave differently depending on the crisis. Banks may be desperately trying to lend to anyone who walks in the door, but if consumers aren't interested in a certain loan, none of that matters.

dwizum
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An additional point to @dwizum's excellent answer.

Real estate loans are based on the value of the underlying property. Conceptually, if you don't pay your mortgage, the bank can foreclose on the loan and sell the property to try to recoup the amount of the loan.

The basic assumption for this is that the property's value will stay the same or perhaps rise a little during the course of the loan.

This works in most scenarios, but in the 2008 crash, property values were dropping with no end in sight. In some areas, they dropped as much as 50% from before the crash.

Under those circumstances, the banks had no way to predict what the underlying value of the property was going to be, so loans with even a 50% down payment would have been more risky than normal.

So during that part of the crisis, not much lending was going on.

When the property stabilized for a few months, you saw at least a return of some lending (but not to the levels before the crash).

user92101
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