Bank lending in the Great Recession and in the Great Depression

The effects of the Great Depression (GD, 1929–1936) on the Italian banking system were worse than those of the Great Recession (GR, 2007–2014), in terms of loan and deposit contraction and of bank failures. When the GD hit the Italian economy in 1929–1930, regulatory restrictions on bank activity were mild, whereas a stricter regulatory framework was in force at the beginning of the GR and notably included bank supervision, capital requirements and deposit insurance. We test the effectiveness of the modern institutional setting by comparing lending policies in the two crises using micro data on bank balance sheets. We find that in the GR banks with higher pre-crisis capital ratios were able to expand lending more than undercapitalized banks, whereas in the GD there were no differences between high and low-capitalized banks.