Asymmetric effects of central bank funding on commercial banking sector behaviour

Afsin Sahin,M Hakan Berument

doi:10.1080/1331677x.2018.1552174

Abstract

In this paper, we assess the effects of Central Bank Funding (C.B.F.) on commercial bank lending behaviour by using weekly Turkish data from 7 January 2011 to 5 June 2015. To be specific, using the Nonlinear Autoregressive Distributed Lag Error Correction Model, we assess the effects of C.B.F. provided daily by the Central Bank of the Republic of Turkey through Open Market Operations to financial markets. Our empirical evidence reveals that for all types of lending, an increase in C.B.F. (which has a higher cost for commercial banks relative to alternatives) forces commercial banks to borrow from higher-cost channels, i.e., we find that increasing C.B.F. discourages commercial bank lending. We also find that decreases in C.B.F. that proxy what commercial banks can borrow more cheaply from alternative sources increase commercial bank lending. However, increasing C.B.F. is more effective than decreasing C.B.F. for Total Bank Loans, Total Credit Cards and Automobile Loans, and decreasing C.B.F. is more effective in the short run for Consumption Loans, Housing Loans and Commercial Loans: short-run asymmetry. Therefore, we can report only limited support for long-run asymmetry, and consequently, claim that there is magnitude (an increase versus decrease in C.B.F.) and category asymmetry (across different lending categories).

Highlights

After the 2008 financial crises, central banks faced challenges in stabilising their economies in addition to addressing price stability and excessive capital flows
With its new financial architecture, the C.B.R.T. provides various types of liquidity to financial markets through various types of costs and restrictions. One such tool is Central Bank Funding (C.B.F.), and the logic behind it is as follows: as the C.B.R.T. cuts types of liquidity with lower costs to financial markets and forces market participants to borrow at a higher cost within the limits of commercial banks’ positions at the central bank, the funding costs of commercial banks will increase and banks will alter their lending behaviour
Our paper contributes to the literature in several ways: (i) Using N.A.R.D.L., we provide empirical evidence on the effect of C.B.F. on various types of commercial bank lending. (ii) We allow asymmetry to show that increases and decreases in C.B.F. affect lending differently. (iii) Our methodology allows us to assess long- versus short-run asymmetry. (iv) Our methodology allows us to compare the effects of C.B.F. on various types of lending

Summary

Introduction

After the 2008 financial crises, central banks faced challenges in stabilising their economies in addition to addressing price stability and excessive capital flows. We analysed the effects of increases versus decreases in C.B.F. on different types of lending and differentiated banking sector credits into Credit Cards, Automobile Loans, Consumption Loans, Housing Loans and Commercial Loans to see whether there was any heterogeneity among the responses. For Turkey, Guler et al (2014) study the effect of C.B.F. on credits and argue that increasing C.B.F. financed by short-term borrowing will increase the maturity mismatch of bank balance sheets, which in turn will increase interest rate risk and affect credits and their compositions. We extend the Guler et al (2014) exercise and analyse the effects of C.B.F. on banking sector credits by using the Nonlinear Autoregressive Distributed Lag model (N.A.R.D.L.), which allows for the asymmetric response of loans to changes in C.B.F. Our model assesses this effect for short- and long-term asymmetry.

Development of Turkey’s monetary policy

Data and methodology

Empirical results and discussion

Robustness analyses

Findings

Conclusions and further research