Financial Instability, Uncertainty and Banks’ Lending Behaviour

26 Pages Posted: 9 Aug 2012

Date Written: August 8, 2012


Why do banks squeeze their lending activity? is an oft-repeated question during the times of financial crisis. This study examines an emerging economy’s banking system and contributes to the evolving body of literature on the topic by providing answers as to what causes the sluggish bank credit during the times of recession. By employing cointegration technique, the study shows that bank credit has a significant positive relationship with the borrowing activity of the banks and on the contrary, inverse relationship with investment activity during the financial crisis. Accordingly, we suggest that banks could increase their lending by increasing the borrowings rapidly either from the Central Banks or from Government supported long term lending institutions during recessionary periods.

Keywords: Time-Series Models, Financial Markets, Interest Rates, Bank lending, Financial Crisis

JEL Classification: C22, D53, E43, E51, G21

Suggested Citation

P.M., Vighneswara Swamy, Financial Instability, Uncertainty and Banks’ Lending Behaviour (August 8, 2012). Available at SSRN: or

Vighneswara Swamy P.M. (Contact Author)

IBS-Hyderabad ( email )

62, Nagarjuna Hill
Hyderabad, TX AP 501504

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