Evidence of a bank lending channel in the UK

Abstract

Using balance sheet data for a panel of UK listed firms, we find evidence of a bank lending channel of monetary transmission. A higher interest rate induces more bank lending to listed companies, but this effect diminishes if monetary policy becomes tight enough to impose severe constraints on bank loan lending. The dynamic behaviour of bank debt versus non-bank debt shows that the lending channel works through cutting back loan supplies to small, bank-dependent firms while restricting the bank’s ability to provide financial assistance to other firms. We see cross-sectional differences between bank-dependent and non-bank-dependent listed companies, and between listed and non-listed companies: Both can contribute to the size effect of investment. Small firms bear most of the reductions in bank loan supplies, and since they do not have many alternatives to bank finance, they suffer more from monetary tightening than big firms. This is consistent with inventory behavior. Furthermore, we have found that big, non-bank-dependent firms can benefit more from the bank–firm relationship than small, bank-dependent firms.