banking system to play its normal role in the transmission of the monetary policy stimulus would have prevented the economy from responding to sizable interest rate cuts.

According to the definition proposed by the Council of Economic Advisors (1991), a credit crunch is "a situation in which the supply of credit is restricted below the range usually identified with prevailing market interest rates and the profitability of - investment projects". Various reasons surveyed in Bernanke and Gertler (1995) and - Hubbard (1995) account for banks' desire to retrench their loan supply following a monetary tightening or some other negative shock to the economy. It is argued that the introduction of the Basel Committee capital standards, induced a credit crunch by making loans more costly to hold for banks than government securities.<sup>5</sup> Various authors, using different methodologies, have contributed to this interpretation. Some of the relevant papers have used cross-sectional bank-level data. Bernanke and Lown (1991) show that loan growth at individual banks between 1990:Q2 and 1991:Q1 was positively linked to initial capital ratios. Peek and Rosengren (1995) introduce an influential method to address the issue of identification of supply-induced effects. Namely, they argue that capital-unconstrained banks should react to negative shocks to capital by intensifying deposit taking, thus, when banks are not capitalconstrained, one should expect a negative relationship between shocks to capital and deposit taking. On the contrary, they find a positive link between shocks to capital and the dynamics of deposits in 1990. They conclude this evidence suggests that the capital constraints for banks were pervasive as the Basel Committee ratios were phased in and, indeed, show that this impact is larger for banks having lower initial capital ratios. Berger and Udell (1994) concur that the expansion of loans was lower in 1990-92 for lesscapitalized banks, but do not detect a sensitivity of loan expansion to capital ratios higher than the one observed during the recession of the early 1980s. All in all, most contributions published on the issue6 support the hypothesis that the capital crunch adversely affected loan expansion in the US at the beginning of the 1990s.

Another episode that has received attention as one in which a capital crunch was likely refers to the Scandinavian countries' banking crisis of the early 1990s. At the beginning of the 1990s Scandinavian banks were heavily exposed to the sharp economic recession and suffered significant loan losses and decreased profitability. Bank capital became scarcer not only because of the events above but also because stricter capital requirements were introduced in response by regulators in order to implement European prudential standards. Applying to the three Scandinavian countries the methodology proposed by Peek and Rosengren (1995), Minetti (1998) finds support for the hypothesis of a capital crunch for Norway and Sweden but not for Finland. In particular, for Norway - and Sweden he detects a positive relationship and not a negative one as it should have S Following the 1988 Basel Committee rules, loans to the private sector require the bank to post a minimum of 8% in qualifying capital equivalent, whereas credits on the State sector bear a zero requirement. In the US, Basel Committee capital standards were formally approved in 1989 and phased in at the end of 1990. **6** A notable exception is Sharpe (1995), who presents a survey of this literature and a critical review of its research findings. He argues that the evidence in favor of a capital crunch is far from conclusive, the only exception being the evidence for banking in New England where the support for the capital crunch is reasonably firm.

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