Credit crunches from occasionally binding bank borrowing constraints

Tom D. Holden, Paul Levine, Jonathan M. Swarbrick

    Research output: Contribution to journalArticlepeer-review


    We present a model in which banks and other financial intermediaries face both occasionally binding borrowing constraints, and costs of equity issuance. Near the steady state, these intermediaries can raise equity finance at no cost through retained earnings. However, even moderately large shocks cause their borrowing constraints to bind, leading to contractions in credit offered to firms, and requiring the intermediaries to raise further funds by paying the cost to issue equity. This leads to the occasional sharp increases in interest spreads and the countercyclical, positively skewed equity issuance that are characteristics of the credit crunches observed in the data.

    Original languageEnglish
    Pages (from-to)549-582
    Number of pages34
    JournalJournal of Money, Credit and Banking
    Issue number2-3
    Early online date13 Jan 2019
    Publication statusPublished - 8 Apr 2020


    • Bank equity
    • Banking
    • Credit crunches
    • Financial crises
    • Interest spreads
    • Occasionally binding constraints


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