Abstract
The bank lending channel of monetary policy suggests that play a special role in the transmission of monetary policy. We look for this special role by examining the business strategies of as it relates to mortgage funding and mortgage lending. Traditional banks have a large supply of excess core deposits and specialize in information-intensive lending to borrowers (which is proxied here using mortgage lending in subprime communities), whereas market-based banks are funded with managed liabilities and mainly lend to relatively easy-to-evaluate borrowers. We predict that only banks operating between these business strategies are likely to increase their loan rate spreads substantially in response to monetary tightening. To fund ongoing mortgage originations, these must substitute from core deposits to managed liabilities, which have a large external finance premium due to these banks' information-intensive lending. Consistent with this prediction, we find evidence of a bank lending channel only among transition - they significantly reduce mortgage lending in response to monetary contractions.
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