Interbank Confidence and Credit Growth

Abstract

Changes in a central bank’s monetary policy are proven to affect credit growth for corporations and households. However, the exact transmission mechanism is still widely debated. This paper adds to the studies on the bank lending channel and focuses on cross-sectional differences among banks and the distributional effects of monetary policy on credit growth. In combination with traditional bank-specific factors, which ought to capture the bank lending channel, we add a measure of the interbank confidence to analyse banks’ credit growth in the Nordic and Baltic States during the period of 2002-2010. We find weak support for the idea that the bank-specific variables help to capture the bank-lending channel in the Nordic and Baltic States. Also, we find that TED spread volatility, which is a proxy for interbank confidence, is a significant determinant of credit growth in the sample region. We argue that this effect is of economic significance. Finally, in contrast to our findings for the Nordic and Baltic countries, but in line with previous research, additional analysis indicates the presence of distributional effects on credit growth in a sample of eurozone banks.