The role of banks in the Czech monetary policy transmission mechanism

With this work, I aim to enrich the knowledge about the monetary policy transmission mechanism in the Czech Republic with empirical evidence on the impact of monetary policy on bank lending. Using a panel of quarterly time series for Czech commercial banks for the period 1996–2001, I study the overall effect of monetary policy changes on the growth rate of loans and the characteristics of the supply of loans. The characterization of the credit market's supply side allows us to make inferences on the operativeness of the credit channel (the bank lending channel and the broad credit channel) of the monetary transmission mechanism. I find that changes in monetary policy alter the growth rate of loans, with considerably stronger magnitude in the period 1999–2001 than in the period 1996–1998. From the analysis intended to capture the characteristics of the supply of loans, I conclude that the lending channel was operative in the period 1996–1998: I find cross‐sectional differences in the lending reactions to monetary policy shocks due to the degree of capitalization and to liquidity. For the subsequent period 1999–2001, the results also show distributional effects of monetary policy due to bank size and its bank's proportion of classified loans. In the context of steadily decreasing interest rates, this can bolster the supposition of financial frictions between borrowers and lenders and hence, that of an operative broad credit channel.     

The Effectiveness of Unconventional Monetary Policy in Japan

Since the global financial crisis of 2007–2008, central bankers around the world have been forced to abandon conventional monetary policy tools in favor of unconventional policies such as quantitative easing, forward guidance, and even lowering the interest rate paid on bank reserves into negative territory. Japan, which faced a crisis in its banking sector and came up against the theoretical zero lower bound on interest rates nearly a decade earlier, was a pioneer in the use of many of these unconventional policy tools. This article analyzes the effectiveness of Japan’s bold experiment with unconventional monetary policy. Using a panel of bi-annual bank data covering the full universe of Japanese commercial banks over a fifteen-year period, this study analyzes the effectiveness of quantitative easing policy on the bank lending channel of monetary policy transmission. Our findings suggest that Japan’s unconventional monetary policy worked: there is a bank lending channel of monetary policy transmission in Japan. These results are robust to the inclusion of time fixed effects and generalized method of moments analysis.     

Monetary transmission with multiple policy rates: evidence from Turkey

Quantitative easing policies have led to persistent divergence between officially announced policy rates and short-term money market rates in many economies, making it challenging to assess the stance of monetary policy in the aftermath of the global financial crisis. Lack of data variation in short-term interest rates across time dimension has made it difficult to identify the monetary transmission mechanisms. In order to shed some light on this topic, we make advantage of a specific period from Turkey during which the central bank deliberately allowed the policy rates to diverge frequently from the interbank rates due to capital flow management purposes. Using bank-level flow data from this episode, we investigate the relationship between various short-term interest rate measures and bank loan/deposit rates through panel estimation methods. Our findings suggest that interbank rates are more relevant than central bank’s officially announced rates for the transmission of monetary policy when the two diverge from each other persistently. Interbank rates particularly play a key role in the pricing of loans and deposits. These findings provide helpful guidance for evaluating the monetary stance under unconventional policies.     

The bank lending channel of monetary policy in EU countries during the global financial crisis

The study examines the existence of the bank lending channel of monetary policy in European Union (EU) countries. The paper advances current research on the monetary transmission mechanism in the following ways: Firstly, we analyze the differences between ‘old’ Economic Monetary Union (EMU) and ‘new’ EU countries. Secondly, we examine the key bank characteristics and monetary policy indicators that may have an impact on the bank lending channel. We assume that short-term market interest rates and monetary aggregate M2 affect banks' activities. We apply the generalized method of moments (GMM) with pooled data from 1999 to 2012. We show that in the pre-crisis period the effect of changing the short-term market interest rates on the bank lending channel of monetary policy is more pronounced among ‘old’ EMU countries, whereas the effect of M2 is significant during the period of the global financial crisis (GFC) among ‘old’ EMU countries. Last but not least the important finding is that banks in ‘new’ EU countries react differently to monetary shocks.     

Capital Flows to Asia: The Role of Monetary Policy

Monetary policy played an important role in the Asian experience with capital inflows. Central banks used monetary policy to contain the threat of overheating, but the resulting increases in interest rates attracted additional inflows. Empirical measurement of these links shows that tight monetary policy was an important source of inflows to Indonesia and Thailand in recent years, and that the independence of monetary policy decreased during the inflow period.     

Bank asset quality & monetary policy pass-through

The funding mix of European firms is weighted heavily towards bank credit, which underscores the importance of efficient pass-through of monetary policy actions to lending rates faced by firms. Euro area pass-through has shifted from being relatively homogenous to being fragmented and incomplete since the financial crisis. Distressed loan books are a crisis hangover with direct implications for profitability, hampering banks ability to supply credit and lower loan pricing in response to reductions in the policy rate. This paper presents a parsimonious model to decompose the cost of lending and highlight the role of asset quality in diminishing pass-through. Using bank-level data over the period 2008–2014, we empirically test the implications of the model. We show that a one percentage point increase in the impairment ratio lowering short run pass-through by 3%. We find that banks with severely impaired balance sheets do not adjust their loan pricing in response to changes in the policy rate at all. We derive a measure of the hidden bad loan problem, the NPL gap, which we define as the excess of non-performing loans over impaired loans. We show that it played a significant role in the fragmentation of euro area pass-through post-crisis.     

Changes in US Monetary Policy and Its Transmission over the Last Century

In this paper, we investigate US monetary policy and its time‐varying effects over more than 130 years. For that purpose, we use a Bayesian time‐varying parameter vector autoregression that features modern shrinkage priors and stochastic volatility. Our results can be summarized as follows: First, we find that monetary policy transmits jointly through the interest rate, credit/bank lending and wealth channels. Second, we find evidence for changes of both responses to a monetary policy shock and volatility characterizing the macroeconomic environment. Effects on the macroeconomy are significantly lower in the period from 1960 to 2013 than in the early part of our sample, whereas responses of short‐ and long‐term interest rates are nearly unaltered throughout the sample. Changes in the way the Fed conducts monetary policy and different economic environments may account for that.     

Bank liquidity risk and monetary policy. Empirical evidence on the impact of Basel III liquidity standards

We extend the literature on the bank lending channel in two aspects. First, rather than following the literature by analyzing the impact of banks’ liquidity (measured via their asset portfolio) on monetary policy transmission, we study the role of banks’ actual liquidity risk, as measured by the Basel III liquidity regulations. Second, we investigate the effect of complying with the Basel III liquidity standards on monetary policy transmission. We use highly detailed bank-level data from Luxembourg for the period 2003q1--2010q4. Our findings are that monetary policy transmission works its way through small banks that also have a large maturity mismatch, as measured by the Net Stable Funding Ratio. In contrast, large banks with a small maturity mismatch increase their lending following a monetary policy shock, which confirms existing results that Luxembourg’s banks are liquidity providers to the European market. Based upon in-sample predictions and upon simulated data from an optimization model that takes the banks’ business models into account, we conclude that the bank lending channel will no longer be effective once banks adhere to the new Basel III liquidity regulations.     

Monetary policy and bank lending in a low interest rate environment: Diminishing effectiveness?

This paper analyses the effectiveness of monetary policy on bank lending in a low interest rate environment. Based on a sample of 108 large international banks, our empirical analysis suggests that monetary policy is less effective in stimulating bank lending growth when interest rates reach a very low level. This result holds after controlling for business and financial cycle conditions and different bank-specific characteristics such as liquidity, capitalisation, funding costs, bank risk and income diversification. We find that the impact of low rates on the profitability of banks’ traditional intermediation activity helps explain the subdued evolution of lending in the period 2010–14.     

The impact of monetary policy on financial markets in small open economies: More or less effective during the global financial crisis?

This paper estimates the impact of monetary policy on exchange rates and stock prices of eight small open economies: Australia, Canada, the Republic of Korea, New Zealand, the United Kingdom, Indonesia, Malaysia, and Thailand. On average across these countries in the full sample, a one percentage point surprise rise in official interest rates leads to a 1% appreciation of the exchange rate and a 0.5–1% fall in stock prices, with somewhat stronger effects in OECD countries than non-OECD countries (though differences are sometimes not significant). We find little robust evidence of a change in the effect of monetary policy surprises during the recent financial crisis.     

The transmission of bank capital requirements and monetary policy to bank lending in Germany

We investigate the transmission of changes in bank capital requirements and monetary policy, and their interaction, on German banks’ corporate loan growth and lending rates. Our results show that increases in capital requirements are associated with an immediate decrease in total domestic and cross‐border bank lending. Changes in the euro area's monetary policy stance are positively related to corporate loan interest rates in general. Regarding the interacting effect of national bank capital requirements and euro area monetary policy, we observe that the transmission of accommodative euro area monetary policy to corporate lending rates can be attenuated by contemporaneous increases in bank capital requirements. Moreover, more strongly capitalized banks increase their loan growth in response to accommodative monetary policy whereas, for weaker banks, increasing capital requirements implies a decrease in their corporate loan growth. Our results confirm a tradeoff between higher capital requirements and accommodating monetary policy originating from banks’ capital constraints.     

Assessing the effectiveness of monetary policy in Kenya: Evidence from a macroeconomic model

This paper examines the effectiveness of monetary policy in Kenya based on policy simulations from a structural macroeconometric model. The analysis is conducted using the policy rate, i.e. the central bank rate (CBR) and the cash reserve ratio (CRR) with respect to the interest rate and bank lending channels, respectively. The results indicate that whereas a change in the policy rate is effective in influencing short term rates, the long term lending rates respond marginally. Consequently, the transmission to the real economy and the overall impact on inflation is minimal. However, a change in CBR has a comparatively higher impact on inflation while a change in CRR has a relatively larger impact on aggregate demand. Enhancing the effectiveness of the CBR and strengthening of the interest rate channel have the potential of anchoring inflation expectations and boosting the effectiveness of monetary policy in Kenya.     

Political incentives and the effectiveness of monetary policy: evidence from China’s city commercial banks

From the perspective of official-and-director (OAD), this article takes studies of the effect of monetary policy on bank loans to the heterogeneity of bank. We explore how political incentives affect the lending channel of monetary policy transmission, using a sample of China’s city commercial banks during 2006–2014. And we further analyse the role of OAD’s characteristics, including administrative rank and age. The results indicate that although tight monetary policy can reduce bank loans, the OAD can weaken this relationship, and the higher is the administrative rank of OAD, the larger is the effect. And the older is OAD, the larger is the effect. More importantly, the relationship between monetary policy and bank loan is insignificant in banks with OAD, implying that the lending channel of monetary policy is absent when considering the role of OAD.     

Bank-lending channel and non-financial firms: evidence for Spain

During the 1990s, liquidity was relatively abundant in the European Union and the European central banks mostly developed a relaxed monetary policy. While the bank lending channel view of the monetary policy would have suggested an increase in loans to firms in this context, the demand for bank corporate lending, however, slowed down, suggesting that monetary policy was not effective in this area. This article analyses how the financing behaviour of Spanish firms during 1992–2003 is related to their liquidity holdings and how this relationship may affect the effectiveness of the bank lending channel. The empirical evidence provided suggests that firms holding high liquid assets may replace bank lending by other sources of financing. Hence, higher liquidity holdings allow firms to invest in attractive investment projects in the event of a tightening of monetary conditions.      

REGIONAL EFFECTS OF MONETARY POLICY IN CHINA: EVIDENCE FROM CHINA'S PROVINCES

This study examines the provincial effects of monetary policy from 1978 to 2011 in China. We used the SVAR method to measure the magnitude and timing of each province's response to monetary policy shocks when considering the influences of spillover effects among provinces. Then we also explored the regional effects of monetary policy employing multiple linear regressions. The results confirm that provinces respond differently to monetary policy actions. It was found that in the short run, the influence of spillover effects on a province's response is very important, but in the long run, the negative influence of deposit transfers overtake the positive impact of the spillover effect. For the factors causing the regional effects on monetary policy, the results show that the interest rate channel is rather weak at the regional level in China. The bank lending channel can explain the regional effects of monetary policy to some extent. Thus in China, the bank lending channel is more effective than the interest rate channel at the regional level.     

How important is the credit channel in the transmission of monetary policy in Mexico?

This article empirically examines the importance of the credit channel of monetary policy in Mexico for the period 2004–2013. We estimate a vector autoregressive (VAR) model to analyse the effects of a monetary policy shock on real output, and we also use a threshold VAR model to investigate asymmetric effects of contractionary and expansionary policies. The empirical results suggest that a contractionary monetary policy results in a fall in the supply of loans together with an increase in the spread between the lending and deposit rate. To the extent that some borrowers are dependent on bank loans for credit, the reduced supply of loans amplifies the effects of monetary policy on output associated with the traditional interest rate channel. Our results also suggest that the importance of the credit channel is larger for contractionary shocks than for expansionary shocks.     

The Bank Lending Channel and Monetary Policy Rules: Evidence from European Banks

There exist two main channels of the monetary transmission mechanism: the interest rate and the bank lending channel. This paper focuses on the latter, which is based on the central bank’s actions that affect loan supply and real spending. The supply of loans depends on the monetary policy indicator, which, in most studies, is the real short-term interest rate. The question investigated in this paper is how the operation of the bank lending channel changes when this short-term indicator is allowed to be endogenously determined by the target rate the central bank sets through a monetary rule. We examine the effect that a rule has on the bank lending channel in European banking institutions spanning the period 1999–2009. The expectations concerning inflation and output affect the decision of the central bank for the target rate, which, in turn, affect private sector’s expectations —commercial banks— by altering their loan supply.     

The effect of US stress tests on monetary policy spillovers to emerging markets

This paper explores the transmission of US monetary policy through US banks to emerging market economies (EMEs) and the role that stress tests play in this transmission. Data on US banks’ monthly commercial and industrial loan originations shows that: (a) US bank lending to EMEs was sensitive to domestic monetary policy changes during the zero‐lower bound period. (b) Effects of monetary easing were heterogeneous across banks and depended on banks’ stress test results, a proxy for their capital strength. Only banks that comfortably passed the stress tests issued more loans to EME borrowers. (c) Effects of monetary tightening were more similar across banks. (d) Banks shifted their lending to safer borrowers within EMEs in response to monetary easing, leaving the risk of their overall loan books unchanged. These results support the hypothesis that bank capital affects the transmission of easier monetary policy, including across borders. We conjecture that bank lending to EMEs during the zero‐lower bound period would have been even higher had the United States not introduced stress tests for their banks.     

The link between the federal funds rate and banking system distress: An empirical investigation

We investigate the association between deviations of the monetary policy rate from its benchmark, and systemic risk between 2001 and 2017. We adopt an impulse response function framework that uses the local projections method model proposed by Jorda (2005). We find that paying interest on reserves by the Fed beginning in 2008 introduced a monetary policy regime shift between the period that the Fed did not pay interest on reserves and the period that it did. Consequently, while we identify a positive and significant link between deviations of the policy rate from its benchmark and systemic risk in the former period, this link was broken in the latter period. During the former period, upsurges in the fed funds rate raised bank costs and increased bank distress. In contrast, during the latter period, interest payment on reserves exceeded the policy rate, except for 2009Q1, and as a result, banks did not expand lending in response to the Fed's reserve injections, instead, holding large amounts of excess reserves. This practice produced greater bank profitability and reduced bank liquidity risk and credit risk, without increasing systemic risk.     

A bank lending channel or a credit supply shock?

Shifts in credit supply could have a bearing on house prices e.g. through financial innovations and changes in regulation independently of the existence of a bank lending channel of monetary policy. This paper assesses the responses of US house prices to an exogenous credit supply shock and compares them with the effects from variations in credit supply associated with a bank lending channel. The contribution of the study is twofold. First, innovations in credit supply are identified using a mortgage mix variable, thereby accounting for the market-based financial intermediaries. As a robustness check a survey variable of bank lending standards for mortgage loans is also used. Second, the policy-induced credit supply effect on house prices is disentangled and compared with the effect from an exogenous credit supply shock. It is shown that in the first 3 years credit supply shocks affect house prices exogenously rather than through the bank lending channel. Monetary policy has still a large impact on house prices, even when the bank lending channel is ‘turned off’.