Popular and academic discussions of bank lending behavior often invoke the idea of cycles in the standards banks use to screen potential borrowers. Such cycles could result from an inherent tendency for banks to overextend themselves during expansions of credit, taking on excessive risk. On the other hand, a simple analytical model demonstrates that apparent variations in lending standards could be a natural aspect of a well-functioning market’s allocation of funds among heterogeneous users.
Amanda L. Kramer
Order single copies or subscribe to Economic Quarterly and other publications from the Federal Reserve System.