Bank competition and monetary policy transmission through the bank lending channel: Evidence from ASEAN

Abstract

We examine the role of bank competition for the transmission of monetary policy through the bank lending channel. We also consider the extent to which banks' characteristics – i.e. size, capitalization and liquidity – affect the banks' response to monetary policy shocks. We apply two structural and two non-structural indices to assess the level of competition. The two-step system GMM dynamic panel estimator is applied to bank level data from five ASEAN countries over the period of 1999–2014. The results from three competition measures (CR5, HHI and Lerner Index) imply that the effect of monetary policy on banks' loans reduces as the level of competition decreases. However, the results from the Boone Indicator suggest that a decrease in the level of competition strengthens the monetary policy transmission through the bank lending channel. The weakening/strengthening effect is stronger for highly capitalized, highly liquid and large banks. These findings are robust in relation to alternative measures of monetary policy and different sample periods. The use of alternative competition measures enables us to argue that based on a single measure, the implications about the role of competition can be misleading. The results of this study necessitate policy measures that can counter the adverse effects of changes in banking competition on the effectiveness of monetary policy transmission.