elizabeth a duke : a framework for analyzing bank lending speech by ms elizabeth a duke, member of the board of governors of the us federal reserve system, at the 13th annual university of north carolina banking institute, charlotte, north carolina, 30 march 2009. the original speech, which contains figures and various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * in august 2008 i joined the board of governors of the federal reserve system, leaving behind a 30 - year career as a commercial banker to become a central banker. my time as a commercial banker spanned numerous business cycles. it also encompassed at least one severe financial system crisis, in the late 1980s through the early 1990s, albeit one that was not as severe as the current one. from my time as a commercial banker, i already understood the factors considered by bankers in the initial lending decision as well as those in loss mitigation when collecting those same loans. as a central banker, i have come to appreciate even more fully the role of credit in our economic well - being. so i thought it would be appropriate for me to provide my perspective on credit conditions in our economy and the current crisis. today, i would like to discuss a three - dimensional view of the flow of credit to households and businesses and describe the evolving role of banks in the u. s. economy. i will begin by taking a look at recent trends in aggregate borrowing by households and by the nonfinancial business sector. these trends will be placed in a historical context by looking back at previous booms and busts in the credit cycle. one might call this the " macroeconomic view " of credit. when looking at aggregate borrowing, it is important to remember that a change in debt outstanding can be driven by any one of three factors or, more commonly, a combination of all three. in the macroeconomic view of credit, i will discuss indicators related to changes in demand for credit. i will also examine two determinants of the supply of credit. the first determinant relates to lenders'assessment of the creditworthiness of borrowers given future economic conditions. the second relates to credit constraints caused by the financial condition of the lenders. although fiscal and monetary policies that improve macroeconomic conditions will also boost the demand for credit and improve the creditworthiness of borrowers, if credit is constrained by the balance sheets of the banks, only programs to relieve such strain will improve credit availability. this

stock price multiplier of about five for unanticipated changes in the federal funds rate is certainly not negligible, we should appreciate that unexpected changes in monetary policy account for a tiny portion of the overall variability of the stock market. unanticipated movements in the federal funds rate of 20 basis points or more are relatively rare ( we observed only thirteen examples in our fourteen - year sample ). yet the change of one percent or so in the stock market induced by the typical 20 - basis - point " surprise " in the funds rate is swamped by the overall variability of stock prices. for example, over the past five years, the broad stock market has moved one percent or more on about 40 percent of all trading days. thus, news about monetary policy contributes very little to the day - today fluctuations in stock prices. we explored our empirical results with some care. we noted, for example, that a few of the monetary policy changes in our sample were followed by what seemed to be excessive or otherwise unusual stock market responses. a number of these responses occurred rather recently, during the fed's series of rate cuts in 2001. the fed's surprise intermeeting cuts of 50 basis points each on january 3 and april 18 of that year were both greeted euphorically by the stock market, with one - day increases in stock values of 5. 3 percent and 4. 0 percent, respectively. by contrast, the rate cut of 50 basis points that the federal reserve has only been formally announcing its policy moves since 1994 added a measure of complexity to our research. before then, market participants generally did not become aware of the fomc's policy decisions until those decisions were actually implemented in the market for bank reserves, often the day after the fomc decision. to the extent possible, we dated the policy change as of the day that the market would have become aware of it, not the day of the decision itself. see the paper for details. investors would not literally expect the fed to cut the funds rate by 31 basis points, since the fed usually moves in 25 - basispoint increments. an average expectation of a 31 - basis - point cut would be consistent with, for example, 62 percent of investors expecting a 50 - basis - point and 38 percent expecting no cut. in principle, news other than the policy decision might affect the federal funds futures contract during the day, so that the measure of unanticipated