Lending Channel Research Articles

International transmission of monetary policy shocks and the bank lending channel: Evidence from Australia

International transmission of monetary policy shocks and the bank lending channel: Evidence from Australia

The collateral channel versus the bank lending channel: Evidence from a massive earthquake

This paper compares the economic impact of the collateral and bank lending channels in a unified framework by taking advantage of exogenous shocks to firms’ tangible assets and banks’ net worth caused by the massive Tohoku earthquake in 2011. We obtain the following findings: (1) both damage to a firm's tangible assets and to the net worth of its primary bank lead to an increase in the probability of the firm being credit constrained, which lends support to the existence of both the collateral and the bank lending channel; (2) the increase through the bank lending channel is about twice as large as and longer-lasting than that through the collateral channel; (3) the credit constraint has real effects: in terms of the aggregated sales decline, the impact through the bank lending channel is more than four times as large as that through the collateral channel, because the negative impact of damage to banks’ net worth spilled over to firms located outside the earthquake-damaged region. Overall, the bank lending channel played a far more substantial role than the collateral channel in the wake of the earthquake.

Monetary-Macroprudential Policy Synergy Through the Bank Lending Channel in Indonesia

ABSTRACT This study examines the efficiency of monetary policy transmission via bank lending channels in Indonesia, specifically emphasizing its interaction with macroprudential policy. We utilize panel data encompassing individual-level information from banks in Indonesia from 2005 to 2019. The results of our analysis provide empirical support for the bank lending channel efficiency in the context of the monetary and macroprudential policy framework. The findings underscore the importance of macroprudential interactions in moderating the effect of monetary policy. Furthermore, our research uncovers asymmetrical consequences stemming from the implementation of monetary contraction/expansion policies, as well as the effects resulting from variances in the characteristics of banks. Our study enhances the understanding of the intricate relationship between monetary policy, macroprudential measures, and the bank lending channel in Indonesia.

Quantitative Easing Impact on Market Liquidity and Inflation

Quantitative easing (QE), mainly including large-scale purchasing, affects the market and economy by liquidity channel. This channel includes two aspects: loan supply and liquidity increases caused by large-scale purchasing. The influence of QE on liquidity is not clear enough. Also, whether such a liquidity creation will lead to inflation needs to be emphasized. This article provides an in-depth analysis of the impact of quantitative easing (QE) on liquidity creation and explores the potential relationship between QE and inflation. The article, based on investigating previous research, gives an overview of the process of quantitative easing’s impact on liquidity creation through large-scale purchasing and lending channels. Meanwhile, the article discusses the possibility of quantitative easing leading to inflation. In conclusion, large-scale purchasing creates market liquidity by increasing loan supply and affecting the securities market. Furthermore, the investment shows that quantitative easing would not generate inflation. The article provides an overview of liquidity creation caused by QE and the potential possible relation between QE and inflation and provides a reference to the future.

International exposure and the transmission of financial shocks: Evidence from China

This study explores the impact of adverse financial shocks on Chinese firms through the bank lending channel and the firm borrowing channel. Using new data linking Chinese firms to their bank(s) and three measures of exposure to international markets, we find that banks with greater exposure to the international markets cut lending more during the financial and sovereign debt crises or when there is a negative shock to OECD GDP growth. Furthermore, state-owned bank loans are more pro-cyclical than private bank loans, and would have been even more pro-cyclical if state-owned banks had not assumed any responsibility for stimulus policies. With regard to the firm borrowing channel, we find that firms with higher weighted aggregate exposure to the international markets through banks have lower net debt, cash, employment, and capital investment during crises or when there is a negative shock to OECD GDP growth. Our results have significant implications for how global financial shocks are transmitted in a regulated financial market such as China.

Sample selection bias in non-traditional lending: A copula-based approach for imbalanced data

Credit scoring models for non-traditional lending channels, such as peer-to-peer (P2P) lending platforms, are usually estimated only on the sample of accepted applicants. This may lead to biased estimates of the risk drivers. This issue can be addressed using a reject inference technique that includes the characteristics of rejected applicants in the model. Due to the low numbers of accepted applicants and default records, credit scoring models usually face a class imbalance problem. However, previous literature on sample selection models for credit scoring does not address the class imbalance issue. To fill this gap, we extend the Generalised Extreme Value (GEV) regression model for binary data to the sample selection framework. We consider the quantile function of the GEV distribution as a link function in both the selection and outcome equations. We use the copula function to model the dependence structure between the two equations for its flexibility. This proposal is called the Sample Selection Generalised Extreme Value (SSGEV) model and it is implemented in the R package BivGEV. We apply this model to a comprehensive dataset provided by Lending Club, and we show that parameter estimates obtained only on accepted P2P applicants are biased and coherently with the literature. The SSGEV model achieves a higher predictive accuracy than those obtained using univariate approaches or a sample selection probit model. Our proposal also provides more conservative estimates of the Value-at-Risk and the Expected Shortfall.

Gender effects in crowdfunded business loan campaigns.

Crowdfunding is a growing source of finance for entrepreneurs. In this paper, we investigate the existence of a gender effect in the time needed to obtain a business loan through crowdfunding. Using data from three Dutch crowdfunding platforms, survival analysis of the time to completion for 934 business loan campaigns shows that female entrepreneurs have a 20% shorter campaign completion time compared to male entrepreneurs, whereas couples do not differ from males. This effect persists across the different platforms. Subsequent analysis shows that female entrepreneurs do not have the disadvantage they face in traditional lending channels when requesting funds through crowdfunding, and that herding behavior by investors benefits female entrepreneurs most.

Bank lending channel and household consumption expenditure in Nigeria

Bank lending channel and household consumption expenditure in Nigeria

Can Conventional Monetary Policy Stimulate Bank Credit? Evidence from a Developing Country

The predominance of bank credit in financing the economies of less developed countries is prompting policymakers to stimulate this mode of financing. This study tests the ability of conventional monetary policy to stimulate the supply of bank credit to the private sector in Morocco. Based on the lending channel as a theoretical framework, an analytical framework to explore the conduct of monetary policy and the preconditions for the functioning of this channel was developed. In addition, a test of the impact of monetary policy on credit supply was conducted using bank-level data from a representative sample of the Moroccan banking sector. The results show that demand factors and the quality of potential borrowers are the main drivers of bank credit growth. They also show that monetary policy in Morocco directly affects credit growth. However, no evidence that this impact is mediated through credit supply was provided, indicating that the credit channel is not operational in Morocco. The policy implications of these results are discussed.

Capital Flow and Bank Lending Channels in a Small Open Economy: Evidence from Indonesia

Capital Flow and Bank Lending Channels in a Small Open Economy: Evidence from Indonesia

Economic Policy Uncertainty and Liquidity Hoarding: Econometric Analysis for Indian Banks

The present study investigates the impact of economic policy uncertainty (EPU) at the national and global levels on a comprehensive measure of bank intermediation, that is, liquidity hoarding (LH) of Indian banks during the 2005 to 2020 period. The findings of the Driscoll–Kraay non-parametric estimator show that Indian banks tend to hoard liquidity in times of economic uncertainty. As per the spillover effects, banks having higher peer LH tend to hoard more liquidity during times of uncertainty compared to lower peer-hoarding banks. Furthermore, the heterogeneity analysis documents that the magnitude of EPU is more destructive for bigger banks, banks with lesser capital bases and liquidity, higher credit risk and public sector banks. Our sensitivity analysis reveals that greater LH is caused by the balance sheet and bank lending channels of credit channel theory. Finally, the study shows that it is imperative to cultivate the growth of financial markets and institutions that can adjust to evolving economic circumstances to lessen the negative effects of EPU.

Cross-sectional financial conditions, business cycles and the lending channel

I document business cycle properties of the cross-sectional distributions of U.S. stock returns and credit spreads. The skewness of returns of financial firms (SRF) best predicts economic activity, while being a barometer for the lending channel—credit supply shifts beyond what is explained by borrowers’ conditions. SRF also predict firm-level investment beyond firms’ balance sheets. Using a structural model, I estimate that while SRF is highly cyclical, shocks to the cross-sectional skewness of financial firms’ asset quality help explain GDP growth in historical episodes. These results point to the cross-section of financial firms playing a prominent role in business cycles.

Impact of Off-Balance-Sheet Activities on the Effectiveness of Monetary Policy

Off-balance-sheet (OBS) activities are special means of credit expansion of commercial banks, which can affect banks’ assets allocation decisions, loans supplies, and the bank lending channel of monetary policy transmission. This paper analyses the impact of OBS activities on banks’ asset allocation and on the effectiveness of monetary policy. Our findings show that increases in OBS activities weaken the effectiveness of price-based monetary policy through the bank lending channel, and this dampening effect is stronger in periods of market liquidity shortage.

Deciphering the black-box of monetary policy transmission in South Asia

Purpose ─ This study aims to identify the role of the bank capital channel by investigating how monetary policy affects bank lending through its influence on bank equity capital, in the transmission of monetary policy.Method ─ The study employs panel vector autoregression (pVAR) to investigate the complex relationship between monetary policy shocks, bank capital, and lending behavior. Results ─ The main findings are as follows: 1) The study finds evidence of both the bank lending and bank capital channels in South Asia. The analysis reveals a Granger causality between changes in bank capital position and policy rate adjustments, indicating a dynamic interplay between these variables. 2) The findings suggest, although direct effects of capital position changes on bank lending appear negligible, a nuanced examination uncovers the moderating influence of capital position changes on the impact of policy rate fluctuations on lending behavior. 3) The study suggests that healthier banking systems weaken the bank lending channel in South Asia.Implications/Significance ─ The study is significant because it sheds light on the mechanism involved in the interplay between monetary policy, bank capital, and lending, providing valuable insights for policymakers and future research directions.

The macroeconomic costs of the bank tax

In this paper, we investigate the real effects of special taxation on banks. We provide evidence that the introduction of a new fiscal levy on banks significantly impairs their performance and has an adverse impact on the real economy through the lending channel. Using micro-level data on lending relationships, we identify the credit supply shock related with a bank tax controlling for loan demand factors. We compute a firm-specific measure of firm exposure to burdened credit institutions. We find a negative impact of the tax shock on investment and output. Our results are important from a policy perspective as they shed light on the economic consequences of double taxation on banks.

Bank Lending Channel of Monetary Policy: Empirical Evidence from Bank Level Data of Selected Emerging Economies

Examining the effects of monetary policy on the bank lending channel is the main objective of this study on a sample of 18 emerging economies from 2006 to 2021 by using bank-level data. Research shows that the bank lending channel does operate and is functional in the banking sectors of the developing countries that were selected for the sample. The econometric models used in the study include sys-GMM, fixed effects, and instrumental variable regression. In particular, results suggest that monetary policy (or monetary tightening) negatively affects whereas economic growth positively influences bank lending. The specific characteristics of bank variables (i.e., liquidity and size) also expand bank lending. One of the most important factors in reducing the negative impact of monetary policy is the size and liquidity of banks. It has been reported through the robustness check exercise that the results largely remain robust when instrumental variable regression is used and when pandemic years are eliminated from the data sample. This research includes significant implications for policy for the selected emerging economies.

U.S. monetary policy shocks and bank lending in Latin America: evidence of an international bank lending channel

ABSTRACT We examine the impact of U.S. monetary policy shocks on bank lending in five major Latin American countries where large U.S. banks have limited presence. Our analysis covers annual balance sheet data from 2000 to 2021 for all banks in these nations, utilizing a recently developed measure of U.S. monetary policy shocks by Bu et al. Our findings reveal the existence of an international bank lending channel, with a one-percentage-point increase in the Fed funds rate resulting in an average 80.6 basis-point reduction in domestic bank loan growth in these countries. Liquidity and solvency emerge as crucial factors driving variations in lending behaviour among Latin American banks, with banks exhibiting stronger liquidity and solvency profiles experiencing higher loan supply growth rates.

Does Exchange Rate Volatility Affect the Bank Lending Channel?

Does Exchange Rate Volatility Affect the Bank Lending Channel?

Zombie-lending during the pandemic in India: Did the Central Bank reduce credit misallocation concerns of forbearance?

During the COVID-19 pandemic, the Reserve Bank of India (RBI) undertook a policy mix approach to maintain financial stability in the Indian banking system. RBI recapitalized the banks and infused liquidity through accommodative monetary policies combined with temporary forbearance policies of restructuring loans to boost credit growth and support economic expansion. With a focus on zombie lending, we examine the effectiveness of this policy mix in bank lending channels during the pandemic. We find banks have extended credit growth to the non-financial listed firms. Broadly, we obtain little evidence of credit misallocation to these firms through zombie lending. Subsequently, we observe a decline in zombie lending to manufacturing and small and medium enterprises. However, our result shows a significant increase in zombie lending towards high rent-seeking industries. We witness that zombie lending does not crowd out healthy lending through the bank and industry congestion channels. The results of our study have significant implications for policymakers. Specifically, our findings suggest that accommodative monetary policy reduces credit misallocation concerns of forbearance. In the absence of monetary policy support, forbearance alone may exacerbate adverse effects.

Revisiting the monetary transmission mechanism via banking from the perspective of credit creation

<abstract> <p>Many transmission channels of monetary policy have been proposed to enrich and deepen the understanding of its mechanisms. However, some channels have not been clarified, particularly for those unconventional quantitative policies implemented after 2008 financial crisis. In this paper, we develop a unified model of a credit economy where bank regulations and decisions and loanable funds market are placed at a central position, while stocks and flows are incorporated with each other to formulate banks' credit creation and circulation. We find that bank regulations can induce some new channels of monetary transmission by imposing credit constraints, including the new bank capital channel, the credit supply channel, the new bank balance sheet channel, and the new bank risk-taking channel. Comparing these channels with the traditional ones, we underscore the impact of bank regulations on monetary transmission. As aggregate demand can be decomposed into two monetary flows generated by money circulation and bank lending respectively, the direct channels of monetary transmission to aggregate demand can be renewed as follows: the money channel, the narrow money circulation channel, the new bank lending channel, and the repayment channel. In addition, based on the relevant data from the United States, we have conducted vector autoregressive (VAR) impulse response analysis to confirm the effectiveness of some direct channels. Our work not only aids in revisiting the monetary transmission from a credit view but also facilitates the assessment of efficiency of monetary policy.</p> </abstract>