Bank Loan Growth Research Articles

New Evidence on the Lending Channel

Do banks play a special role in the transmission mechanism of monetary policy? I exploit the presence of internal capital markets in bank holding companies to isolate plausibly exogenous variation in the financial constraints faced by banks. I demonstrate that affiliated bank loan growth is less sensitive to changes in the federal funds rate and that affiliated banks are better able to smooth insured deposit outflows by issuing uninsured debt. Financial constraints matter for equilibrium lending as state loan growth also becomes less sensitive to changes in the federal funds rate as loan market share of affiliated banks increases, but do not seem to matter for equilibrium real variables, as state output growth is largely unaffected.

Bank capital and loan asymmetry in the transmission of monetary policy

Utilizing a bank-lending channel framework, we investigate the effects of expansionary and contractionary policy separately on the loan behavior of low-capital and high-capital banks, and between pre-Basel/FDICIA and post-Basel/FDICIA periods. Our results show that low-capital banks are adversely affected by contractionary policy. Expansionary policy, however, is not effective in stimulating the loan growth of low-capital banks. These results are consistent with lending channel predictions, but only hold in the post-Basel/FDICIA period when the capital constraint is stringent relative to the pre-Basel/FDICIA period. These asymmetric policy results have implications for the interaction of monetary and capital regulatory policies.

Internal Capital Markets in Financial Conglomerates: Evidence from Small Bank Responses to Monetary Policy

This paper investigates internal capital markets in financial conglomerates by studying the responses of small banks to changes in monetary policy. I find that if a small bank operates on a stand-alone basis, then that bank's loan growth becomes significantly more dependent on its own cash flows as monetary policy is tightened. In contrast, if a small bank operates under a multi-bank holding company with another bank with easy access to nonreservable funds, then the small bank's loan growth does not become more sensitive to its own cash flows in periods of tight money. My evidence shows that internal capital markets in financial conglomerates relax the constraints faced by affiliates unable to raise funds via liabilities that bear credit risk. Further analysis indicates that internal capital markets have the potential of lessening the impact of Fed policies on bank lending activity. The paper also examines the role of internal capital markets in influencing the investment allocation process of conglomerates. In a sample of constrained (unconstrained) multi-bank holding companies, comparisons across bank affiliates of the same conglomerate show that the funding of new loans becomes less (more) sensitive to affiliate-level cash flows for the worst affiliates relative to the best affiliates following a tightening. My findings suggest that frictions between conglomerate headquarters and external capital markets are at the root of investment inefficiencies generated by internal capital markets.

Modeling Foreign Bank Performance and Lending Behavior

This paper examines the profitability and commercial loan growth of foreign banks using a simultaneous‐equation framework. Maximizing behavior provides a two‐equation system in which bank profitability depends on variables related to expected returns, costs, and risks and in which loan growth is determined by risk and return variables. The model is tested to evaluate the determinants of foreign bank performace and lending behavior in the United States between 1987 and 1991. Overall the results indicate that factors such as capital strength, commercial and industrial loan growth, and assets composition were important in determining foreign banks’ return‐on‐assets in the period under study. The role of capital appears to be particularly important in explaining foreign bank performance. The single significant determinant of loan growth was found to be previous period's loan growth.

Capital market frictions and the role of internal capital markets in banking

The extent to which banking firms face external financing costs when funding new loans has important implications for the role of banks in the corporate capital acquisition process, for the effectiveness of monetary policy and for the impact of capital requirements. We investigate this issue by examining the cash-flow sensitivity of loan growth at bank holding companies, and by examining the extent to which holding companies establish an internal capital market to allocate capital among their various subsidiaries. Overall, we find that loan growth at subsidiary banks is more sensitive to the holding company's cash flow and capital position than to the bank's own cash flow and capital. Moreover, we find that bank loan growth is negatively correlated with loan growth among the other subsidiaries within the holding company. Overall, this evidence suggests that bank holding companies establish internal capital markets to allocate scarce capital among their various subsidiaries.