Department of Economics the Second Moments Matter: the Response of Bank Lending Behavior to Macroeconomic Uncertainty

In this paper we investigate whether macroeconomic uncertainty could distort banks’ allocation of loanable funds. To provide a road– map for our empirical investigation, we present a simple framework which demonstrates that lower uncertainty about the return from lending should lead to a more unequal distribution of lending across banks as managers take advantage of more precise knowledge of different lending opportunities. When bank–specific differences in lending opportunities are harder to predict, we should observe less cross– sectional variation in loan–to–asset ratios. Using a comprehensive U.S. commercial bank data set, we receive support for our hypothesis. JEL: C22, C23, D81, E51.