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 normal and downside scenarios. By combining these projections with comprehensive information on bank lending, we document several findings. First, banks’ expectations about economic conditions under normal and downside scenarios have different determinants (e.g., opposite loading on MSA outcomes in the Great Recession). 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 their banks are more pessimistic about the downside scenario. 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. Finally, banks that were more pessimistic about the downside pre-COVID have fewer past due loans after the pandemic (stronger balance sheets), but continue to lend less due to persistent pessimism.