Three essays on bank balance sheets and disruptions in the supply of intermediated credit

The following dissertation comprises three self-contained chapters that describe several mechanisms by which financial factors can impact banks' ability or willingness to supply credit. Given banks' unique position at the front lines of monetary transmission, it is important for policy makers to fully understand how the financial condition of banks can lead to changes in credit supply that can in turn impact the real economy. Intermediated credit has no reasonable substitute for many firms in the United States. This is especially true for small businesses that make significant contributions to employment and growth and often depend on relationship-based bank credit as an important source of funds.;Chapters II and III help define the role that banks play in the propagation of monetary policy. Deepening the understanding how monetary policy is transmitted through the economy is essential for both evaluating the stance of policy at a given time and assessing the timing and effect of monetary actions. Chapter II presents an empirical test of the balance sheet channel of monetary policy. According to this channel, monetary policy actions impact the financial position of borrowers, causing banks to withdraw credit. I provide evidence that a subset of banks exhibit a balance sheet channel that can lead to significant reductions in lending to small firms. Chapter III constructs a test for a recently described channel of monetary policy known as the bank capital channel. In this chapter, I demonstrate that the sensitivity of banks' capital positions to monetary policy can be used to explain cross-sectional differences in loan growth. This study not only adds to the scarce capital channel literature but also highlights important interactions between the regulatory and stabilization functions of most modern central banks. Finally, Chapter IV develops a new "early warning" methodology that can be used to help forecast the financial health of banks, which affects their ability to extend credit. Included in the chapter is an application in which I identify some predictors of the severity of stress large banks realized during the height of the subprime mortgage crisis.