Monetary Policy,Bank Lending,and the Risk‐Pricing Channel

This paper identifies a monetary policy channel through the risk pricing of bank debt in the market for jumbo certificates of deposit (jumbo CDs). Adverse policy shocks increase debt holder perceptions of bank default, increasing the risk premia for some banks, thereby decreasing their external funding of loans. The results show that contractionary policy increases the sensitivity of jumbo‐CD spreads to leverage and asset risk for small banks, and to leverage for large banks. The results also show a distributional and aggregate effect on banking system jumbo CDs and total loans, producing a risk‐pricing (or market discipline) channel. This channel has implications for monetary and regulatory policies, and financial stability.     

Monetary Policy and the Asset Risk‐Taking Channel

How important is the risk‐taking channel for monetary policy? To answer this question, we develop and estimate a quantitative monetary DSGE model where banks choose excessively risky investments, due to an agency problem that distorts banks' incentives. As the real interest rate declines, these distortions become more important and excessive risk taking increases, lowering the efficiency of investment. We show theoretically that this novel transmission channel generates a new monetary policy trade‐off between inflation and real interest rate stabilization, whereby the central bank may prefer to tolerate greater inflation volatility in order to lower excessive risk taking.     

Identifying the balance sheet and the lending channels of monetary transmission: A loan-level analysis

We make a novel attempt at comparing the strength of the lending and balance sheet channels of monetary transmission. To make this comparison, we use loan-level data to determine how borrower balance sheets and bank liquidity are related to bank lending decisions and how monetary policy can affect these relationships. The key innovation in this paper is the use of loan-level data. This enables us to measure the independent effects of the two channels and directly account for borrower balance sheets and lender liquidity instead of using proxies. Our results show that the balance sheet channel is the main mechanism through which monetary policy shocks are transmitted to the economy and that the lending channel does not play a significant role.     

The Risk‐Taking Channel of Monetary Policy: Exploring All Avenues

The literature on the risk‐taking channel of monetary policy grew quickly, leading to scattered evidence. We examine this channel through different angles, exploring detailed information on loan origination and performance. Ex ante riskier borrowers receive more funding at the extensive margin when interest rates are lower. Ex post performance is independent of the level of interest rates at origination. Still, loans granted in periods of very low and stable interest rates show higher default rates once interest rates start to increase. Risk‐taking is stronger among banks with lower capital ratios, suggesting that this channel may be linked to managerial incentives for risk‐shifting.     

利率市场化视角下货币政策对银行流动性创造的影响——基于银行风险承担的中介效应检验

运用1997-2015年中国186家银行的非平衡面板数据,实证检验银行风险承担在货币政策影响银行流动性创造过程中所发挥的中介效应.结果发现:货币政策通过影响银行风险承担而对银行流动性创造产生影响,即银行风险承担在货币政策影响银行流动性创造的过程中起到了中介作用.此外,货币政策通过影响银行风险承担对银行表内流动性创造和表外流动性创造都会产生影响.采用四种货币政策度量指标、两种银行流动性创造度量指标和两种银行风险承担度量指标的稳健性检验均支持了以上结论.进一步的实证研究表明:货币政策对银行风险承担和银行流动性创造的作用都会受到利率市场化水平的影响,即随着利率市场化水平的提升,货币政策对银行风险承担的影响会有所减弱,价格型货币政策对银行流动性创造的影响也会降低.     

Sovereign risk and the bank lending channel in Europe

The main purpose of this article is to analyze how sovereign risk influences the loan supply reaction of banks to monetary policy through the bank lending channel. Additionally, we aim to test whether this reaction differs in easy and tight monetary regimes. Using a sample of 3125 banks from the euro zone between 1999 and 2012, we find that sovereign risk plays an important role in determining loan supply from banks during tight monetary regimes. Banks in higher sovereign risk countries reduce lending more during tight regimes. However, we find little evidence to support any relationship between sovereign risk and loan supply reaction to monetary policy expansions. These results are very interesting for the way monetary policy is conducted in Europe. Banking union, banking system strength, and the budget control of governments would be necessary measures to reduce the heterogeneous transmission of the monetary policy in the euro zone.     

Consolidation in banking and the lending channel of monetary transmission: Evidence from Asia and Latin America

This paper examines the relationship between increased consolidation in banking and monetary policy transmission in eighteen Asian and Latin American economies, using bank-level data from 1996 to 2006. Our results provide consistent evidence that as concentration in banking increases, the bank lending channel is weakened, leading the monetary policy transmission mechanism to be less effective. We also investigate how this relationship between concentration and the strength of the lending channel depends on bank-specific characteristics. Using bank-level balance sheet and income statement data allows us, first, to better identify the effects of banking consolidation on the supply-side bank lending channel from those of the demand-side interest rate channel, and second, to test for any systematic differences in the impact of consolidation on monetary policy transmission across banks of different size and financial strength. We also discuss potential explanations for and policy implications of the main findings of this paper.     

The cost of deviating from the optimal monetary policy: A panel VAR analysis

Exploiting the panel VAR GMM estimator's features, macroeconomic country factors are combined with micro-economic bank data to test for the risk taking channel in the Euro Area. According to prior expectations based on an extended DSGE model, the analysis demonstrates that the monetary policy incentives bank risk taking by increasing the bank leverage, but it is not able to influence the level of credit risk. However, deeper investigations indicates the Taylor gap adds to the bank risk appetite in all its forms, while regarding the reactions to target variables, movements in the interest rate smooth the bank risk.     

Optimal Monetary Policy with an Uncertain Cost Channel

The cost channel of monetary transmission describes a supply-side effect of interest rates on firms' costs. Previous research has found this effect to vary, both over time and across countries. Moreover, the cyclical nature of financial frictions is likely to amplify the cost channel. This paper derives optimal monetary policy in the presence of uncertainty about the true size of the cost channel. In a min–max approach, the central bank derives an optimal policy plan to be implemented by a Taylor rule. It is shown that uncertainty about the cost channel leads to an attenuated interest rate setting behavior. In this respect, the Brainard (1967) principle of cautious policy in the face of uncertainty continues to hold in both a Bayesian and a min–max framework.     

The Bank Lending Channel Revisited

A central proposition in research on the role of banks in the transmission mechanism is that monetary policy imparts a direct impact on deposits and that deposits act as the driving force of bank lending. This paper argues that the emphasis on policy‐induced changes in deposits is misplaced. A reformulation of the bank lending channel is proposed that works primarily through the impact of monetary policy on banks’ balance sheet strength and risk perception. Such a recasting implies, contrary to conventional wisdom, that greater reliance on market‐based funding enhances the importance of the channel.     

Implications of bank ownership for the credit channel of monetary policy transmission: Evidence from India

Using bank-level data from India, we examine the impact of ownership on the reaction of banks to monetary policy, and also test whether the reaction of different types of banks to monetary policy changes is different in easy and tight policy regimes. Our results suggest that there are considerable differences in the reactions of different types of banks to monetary policy initiatives of the central bank, and that the bank lending channel of monetary policy is likely to be much more effective in a tight money period than in an easy money period. We also find differences in impact of monetary policy changes on less risky short-term and more risky medium-term lending. We discuss the policy implications of the findings.     

One Size Fits All? Monetary Policy and Asymmetric Household Debt Cycles in U.S. States

I investigate the nonlinear effects of monetary policy through differences in household debt across U.S. states. After constructing a novel indicator of inflation for the states, I compute state‐specific monetary policy stances as deviations from an aggregate Taylor rule. I find that the effectiveness of monetary policy is curtailed during periods of large household debt imbalances. Moreover, a common U.S. monetary policy does not fit all; it may have asymmetric effects on the economic performance across states, particularly at times of high dispersion in the household debt imbalances, as it may have been the case around the Great Recession.     

The dampening effect of bank foreign liabilities on monetary policy: Revisiting monetary cooperation in East Asia

This paper addresses the cost of formal monetary cooperation from the perspective of monetary policy effectiveness. As banks tend to borrow from abroad in foreign currencies to fund domestic lending, monetary policy may have a reduced effect on the credit market and the economy. Results derived from bank level data in East Asia indicate that bank foreign liabilities significantly reduce the effectiveness of the credit channel of monetary policy, implying a relatively low cost of giving up monetary autonomy.     

Optimal Monetary Policy with Countercyclical Credit Spreads

We study optimal monetary policy in a New‐Keynesian Dynamic Stochastic General Equilibrium (DSGE) model with a credit channel and relationship lending in banking. We show that borrowers' bank‐specific (deep) habits give rise to countercyclical credit spreads, which, in turn, make optimal monetary policy depart substantially from price stability, under both discretion and commitment. Our analysis shows that the welfare costs of setting monetary policy under discretion (with respect to the optimal Ramsey plan) and of using simpler suboptimal policy rules are strictly increasing in the magnitude of deep habits in credit markets and market power in banking.     

Firm balance sheets and monetary policy transmission

The functioning of internal capital markets in financial conglomerates facilitates a novel identification strategy of the balance sheet channel of monetary policy. We look at small subsidiary banks that are affiliated with the same holding company but operate in different geographical areas. These banks face the same marginal cost of funds due to internal capital markets, but face different borrowers as they concentrate their lending with small local businesses. Exploring cross-sectional variation in local economic conditions across these subsidiaries, we investigate whether borrower creditworthiness influences the response of bank lending to monetary policy. Our results are consistent with a demand-driven transmission mechanism that works through firm balance sheets and is independent from the bank lending channel.     

Monetary Policy and Financial Stability: Cross‐Country Evidence

We explain the heterogeneous response of central banks to financial stability risks based on a financial stability orientation (FSO) index, which reflects statutory, regulatory, and discretionary components of central banks' monetary policy frameworks. Our baseline results from a cross‐country panel of modified Taylor rules suggest that central banks with a high FSO increase their policy rates in response to elevated financial stability risks by 0.27 percentage points more than central banks with a low orientation. Back‐of‐the‐envelope calculations suggest that this policy rate differential translates into a reduced crisis probability but also into considerably lower inflation and output growth rates.     

Foreign bank penetration and the lending channel in emerging economies: Evidence from bank-level panel data

This paper examines the main implications of recently increasing foreign bank penetration on bank lending as a channel of monetary policy transmission in emerging economies. Using a dynamic panel model of loan growth, we investigate the loan granting behavior of 1273 banks in the emerging economies of Asia, Latin America, and Central and Eastern Europe during the period from 1996 to 2003. Applying the pooled OLS, system GMM, and panel VAR estimators, we find consistent evidence that foreign banks are less responsive to monetary shocks in host countries, as they adjust their outstanding loan portfolios and interest rates to a lesser extent than domestic private banks, independent of their liquidity, capitalization, size, efficiency, and credit risk, and although there exists a bank lending channel in the emerging economies, it is declining in strength due to the increased level of foreign bank penetration. We also explore possible driving factors for the different responses of foreign and domestic banks to monetary policy shocks by investigating foreign banks’ different behavior during banking crises and tranquil periods, the effects of mode of entry to host countries, the home-country effects, and the response of foreign banks from OECD countries vs. all foreign countries including non-OECD countries. We suggest the access of foreign banks to funding from parent banks through internal capital markets as the most convincing explanation.     

The conditioning role of performance on the bank risk-taking channel of monetary policy: Evidence from a multiple-tool regime

The study investigates how monetary policy affects bank risk-taking under a multiple-tool regime of Vietnam during 2007–2018. Particularly, we also consider the conditioning role of bank performance, broken down by bank profitability and cost efficiency, in this nexus. Using both dynamic and static panel models, we show that the liquidity injection initiated by the central bank’s asset purchases induces banks to take more risks, captured by the traditional Z-score and two alternative measures of credit risk. However, monetary policy easing through decreased interest rates is beneficial to the credit portfolio and financial stability of banks, which therefore challenges the functioning of the bank risk-taking channel. This startling result is robust across three different interest rate measures, including lending rates, refinance rates and rediscount rates. Further analysis reveals that our observed effects are alleviated for banks with higher performance — i.e., more profitable and efficient banks. This in-depth finding offers more insights into the “search for yield” incentive, based on the theory of information asymmetry and the two competing hypotheses of “bad management” and “cost skimping”.     

The effect of bank ownership and deposit insurance on monetary policy transmission

In this paper we develop a theoretical model with a representative bank whose ownership is shared between state and private sector. The bank faces a risk of failure and provides private and public explicit deposit insurance. Banks owned to a larger extent by the government are more able to counteract a restrictive monetary policy because of their capacity to raise additional volume of deposits. Therefore, the greater the state’s share in the bank ownership, the less the impact of a monetary tightening on the level of loan supply.     

MONETARY POLICY INDICATORS AS PREDICTORS OF STOCK RETURNS

We explore the linkage between stock return predictability and the monetary sector by examining alternative proxies for monetary policy. Using two complementary methods, we document that failure to condition on the Fed's broad policy stance causes a substantial understatement in the ability of monetary policy measures to predict returns. Industry analyses suggest that cross‐industry return differences are also linked to changes in monetary conditions, as monetary policy has the strongest (weakest) relation with returns for cyclical (defensive) industries. Overall, we find that monetary conditions have a prominent and systematic relation with future stock returns, even in the presence of business conditions.