Expectations and Bank Lending
We study the properties and the impact of lenders’ expectations using a new dataset on banks’ economic projections about all MSAs in the US, reported annually for both the baseline scenario and the severely adverse scenario. By combining this dataset with lending data from the US supervisory credit registry, we document several findings. First, banks’ expectations about the baseline and the downside tail scenarios have different determinants (e.g., opposite loading on MSA outcomes in the previous crisis). Second, expectations at a given point in time display substantial dispersion across banks for the same MSA and across MSAs for the same bank. Third, firms have lower loan growth when banks are more pessimistic. The results hold with firm-year fixed effects: for the same firm in a given year, there is less lending from more pessimistic banks. Lenders’ pessimism is also associated with higher interest rates, which further indicate reductions in credit supply. Moreover, there are negative real effects on firm-level total borrowing and capital expenditures, especially among firms with limited sources of financing, and on MSA-level output growth. Fourth, expectations about the downside tail scenario have a strong impact on lending, whereas expectations about the baseline do not. Finally, banks that were more pessimistic pre-COVID have fewer past due loans after the pandemic (stronger balance sheets), but continue to lend less due to persistent pessimism.