Weakly-capitalized banks cut lending, increase risk during COVID-19 pandemic.
Banks managed their liquidity differently during the COVID-19 pandemic. The pandemic led to a surge in people saving money and the Federal Reserve injecting liquidity into the system. Weakly-capitalized banks did not have to offer higher deposit rates to keep money in, and they increased lending at first but then cut back. Stronger banks increased lending in line with deposits. Banks with more liquidity risk saw more money leaving and relied more on the Fed for help.