Financial Deregulation and the Bank Lending Channel in Developing Countries: The Case of Indonesia

The dominant role of commercial banks as a source of finance and the considerable asymmetry of information in financial markets in developing countries have raised an argument that the bank lending channel of monetary transmission mechanism would be very important in such countries. This study addresses the issue by investigating empirically whether there are differential effects of monetary policy on banks' balance sheets, and its implications to the existence of the bank lending channel of monetary policy in Indonesia, especially since the early 1980s when the government adopted a policy of financial deveculation. We find significant differences of balance sheet behaviour across bank classes in response to a change in monetary policy, consistent with the predictions of the bank lending view. We also found that because of access to foreign funds and the existence of bank loan commitment, the monetary policy was unable to constrain loan supply by the large (state) banks, indicating that the bank lending channel operates through smaller (non-state) banks.     

Some Evidence on the Relevance of Bank Behaviour for the Lending Channel in The Netherlands

This paper studies the behaviour of Dutch banks. We test the adjustment of banks' balance sheets in times of monetary policy changes during the period 1957–1991. As a reaction to a policy change, banks basically have two alternatives to adjust their net money creation: (1) sell securities in public capital markets, and/or issue long-term liabilities, and (2) change domestic loan supply. If banks opt for the latter a lending channel may be relevant, even in a small open economy with a fixed exchange rate and a high degree of international capital mobility. We test for the effectiveness of both indirect and direct instruments of monetary policy. It turns out that in case of changes in the official interest rate, the volume of bank loans is not affected and that banks display a kind of buffer-stock behaviour by diminishing their publicly traded assets. In situations with quantity restrictions on the growth of net money creation, however, the volume of loans is affected significantly when the quantity restriction is withdrawn thereby fulfilling a necessary condition for the bank lending channel to be effective.     

Microdata Evidence on the Bank Lending Channel in the Netherlands

This study contributes to the empirical evidence on the lending channel in the Netherlands using individual bank data. The main conclusion is that a lending channel is operative in the Netherlands. However, it is only operative for unsecured lending and not for secured lending, possibly because loans with government guarantees get special treatment by banks. Effects of monetary tightening on unsecured lending are more negative for smaller, less liquid and less capitalised banks, in line with the lending channel theory. The contribution of this study is that it gives evidence that the monetary policy impact on bank lending also depends on the market segment in which a bank is active. The evidence suggests that the policy impact is weaker on credit to households than it is on lending to firms.     

The lending channel of monetary policy in Indonesia

This study evaluates the bank lending channel of monetary policy in Indonesia by using quarterly bank-level data over the period of 2005-2016. I find that the lending channel of monetary policy works for all banks, both large and small. The results suggest that higher capital buffers and better liquidity positions moderate the impact of changes in monetary policy on credit growth for large banks, while capital buffers and liquidity positions do not alter the strength of the lending channel for small banks. The findings indicate that the central bank can use prudential instruments affecting capital buffers and liquidity positions for managing the strength of adjustment in the monetary policy interest rate on bank credit growth.     

The Bank Lending Channel in the Netherlands: The Impact of Monetary Policy on Households and Firms

This paper presents empirical evidence of the existence of a bank lending channel in the Netherlands by analyzing the responses of different borrower groups to a contraction of monetary policy. It is found that corporate loans are depressed only after a lapse of over a year, whereas household loans decrease almost instantly due to an interest rate rise. However, since the latter reaction is not accompanied by a fall in consumer expenditure, the bank lending channel is probably not very important for the transmission of monetary policy in the Netherlands. It appears that households, as well as banks and firms, tend to buffer monetary policy shocks through adjustments in liquid financial instruments.We would like to thank the managing editor, two anonymous referees as well as R. Lensink (University of Groningen), E. Sterken (University of Groningen), P. Vermeulen (ECB) for their comments, and J. Kakes (the Netherlands Bank) for his research assistance     

Bank loans and the effects of monetary policy in China: VAR/VECM approach

In this paper, we test the differential effects of monetary policy shock on aspects of banks' balance sheets (deposits, loans, and securities) across bank categories (aggregate banks, state banks, and non-state banks) as well as on macroeconomic variables (output, consumer price index, exports, imports, and foreign exchange reserves). We do so by estimating VAR/VEC Models to uncover the transmission mechanisms of China's monetary policy. Also we identify the cointegrating vectors to establish the long-run relationship between these variables. By using monthly aggregate bank data and disaggregated data on bank and loan types from 1996 to 2006, our study suggests the existence of a bank lending channel, an interest rate channel and an asset price channel. Furthermore, we discuss and explore the distribution and growth effects of China's monetary policy on China's real economy. In addition, we investigate the effects of China's monetary policy on China's international trade. Finally, we identify the cointegrating vectors among these variables and set up VEC Models to uncover the long-run relationships that connect the indicators of monetary policy, bank balance sheet variables and the macroeconomic variables in China.     

The transmission mechanism of monetary policy in Japan: Evidence from banks' balance sheets

We examine how banks' responses to monetary policy vary according to their balance sheet using Japanese bank data from 1975 to 1999. We find that the effect of monetary policy on lending is stronger for banks that are smaller, less liquid, and more abundant with capital. The effects of bank balance sheet on monetary transmission are different by bank types, policy stances and borrowers' industries. Our results imply that a lending channel of monetary transmission exists, that the effect of expansionary monetary policy is attenuated if banks' capital is scarce, and that the effect of monetary policy on the allocation of funds depends on banks' balance sheets. J. Japanese Int. Economies 20 (3) (2006) 380–405.     

Bank profitability and the bank lending channel: Evidence from China

This paper uses bank-level data to investigate whether the impact of monetary policy on bank lending depends on the characteristics of Chinese banks during the period 1985–2007. We find that the impact of monetary policy on lending is weaker for larger banks and banks with lower levels of liquidity, and that banks’ responses to monetary policy do not necessarily vary according to their capital. Further, to identify the bank lending channel more clearly, we test whether the impact of monetary policy varies according to profitability. The results show that profitable banks tend to be less sensitive to monetary policy, because when tight monetary policy leads to a fall in deposits, less profitable banks face a higher cost of capital.     

Influence of the Banks' Money Mediation Behavior on the Monetary Policy: A Study of Korean Case

Abstract

This paper analyses how financial institutions' arbitrary intermediation behaviors, including adjustments in bank lending and deposit rates, influence monetary policy transmission channels. For the analysis, we develop a New Keynesian Dynamic Stochastic General Equilibrium (NK DSGE) model with parameters estimated to fit the Korean conditions. The role of banks is subsequently examined by classifying monetary policy transmission channels (real rate channel, nominal debt channel, financial accelerating channel, and banking attenuator channel). A notable part of this analysis is the inclusion of the banking sector in the model specifically with the intent to study transmissions from the financial sector to the real economy. This paper follows this line of inquiry with recent research in mind. Empirical analysis verifies the existence of the banking attenuator effect in Korea, which means banks act to reduce the effect of monetary policies. This indicates that if financial intermediaries strengthen arbitrary adjustment behaviors of lending and deposit rates, the effect of the monetary policy intended to relieve volatility in the business cycle may not be as high as expected.     

货币乘数存在吗——基于我国银行业资产负债数据的信贷传导机制有效性分析

商业银行以同业业务为主的非存款负债以及影子银行体系的发展大大弱化了货币乘数论的有效性,货币供给内生性增强。本文从理论及实证两个方面研究货币乘数论与银行信贷传导机制的有效性。对于央行能否影响商业银行贷款规模这一点,无论是理论分析还是实证检验的论据都不充分。实证研究表明：由于同业负债、理财业务以及出售持有债券获得流动性支持等外部融资渠道的存在,商业银行贷款并不一定受到存款约束,导致传统的货币乘数论失效。在法定准备金率这一数量型货币政策工具有效性降低的前提下,我国货币政策对于宏观经济的影响具有更大的不确定性,央行只有对商业银行等主体的放贷行为和货币创造能力实施有效控制,货币政策才能达到预期效果。     

资本充足率、存款准备金率与货币政策银行信贷传导——基于银行业市场结构的分析

基于垄断竞争的银行业市场结构,研究银行在受到资本充足率和存款准备金率双重约束条件下,在面对货币政策冲击的情况下所做出的最优信贷决策行为。通过构造贷款市场总体均衡模型,得出以下结论:当银行满足资本充足率和存款准备金率要求时,货币政策的银行信贷传导渠道表现出有效性;而当贷款市场中的银行不能满足资本充足率或存款准备金率要求时,货币政策的银行信贷传导渠道则表现出无效性。     

DYNAMIC EFFECTS OF MONETARY POLICY SHOCKS IN MALAWI

This paper sets out to investigate the process through which monetary policy affects economic activity in Malawi. Using innovation accounting in a structural vector autoregressive model, it is established that monetary authorities in Malawi employ hybrid operating procedures and pursue both price stability and high growth and employment objectives. Two operating targets of monetary policy are identified, viz., bank rate and reserve money, and it is demonstrated that the former is a more effective measure of monetary policy than the latter. The study also illustrates that bank lending, exchange rates and aggregate money supply contain important additional information in the transmission process of monetary policy shocks in Malawi. Furthermore, it is shown that the floatation of the Malawi Kwacha in February 1994 had considerable effects on the country's monetary transmission process. In the post‐1994 period, the role of exchange rates became more conspicuous than before although its impact was weakened, and the importance of aggregate money supply and bank lending in transmitting monetary policy impulses was enhanced. Overall, the monetary transmission process evolved from a weak, blurred process to a somewhat strong, less ambiguous mechanism.     

Loan interest rate pass-through and changes after the financial crisis: Japan’s evidence

We estimate interest rate pass-through in the loan market using an individual bank-based panel dataset from Japan. Previous studies using data from European countries have presented a number of common findings, including that banks with a high proportion of relationship lending tend to set lower pass-through. In this respect, we have obtained similar results using a dataset for Japan going back to the early 2000s. We further examine the influence of borrowing firms’ balance sheet characteristics on loan interest rate pass-through, and find that these additional factors are also important determinants for pass-through dispersion. However, after the recent global financial crisis, even banks with a high proportion of relationship lending have largely lowered loan interest rates by raising pass-through, and pass-through has not necessarily been determined in accordance with borrowing firms’ balance sheet characteristics. These results differ from those of recent studies on European countries. Possible background factors explaining this change are that (i) pressure to lower loan interest rates has risen due to extensive monetary easing and greater lending competition among banks, while Japan’s banking system as a whole has maintained its resilience in the post-crisis period; (ii) demand for bank loans has increased substantially due to disruptions in the market for alternative funding sources, such as commercial paper and corporate bonds; and (iii) public measures to increase bank loans have been broadly introduced in Japan.     

Policy rate pass-through and the adjustment of retail interest rates: Empirical evidence from Malaysian financial institutions

The paper examines the interest rate pass-through from money market rates to various retail rates in Malaysia within the framework of an error-correction model. We estimate the short- and long-run interest rate pass-through and analyse the asymmetric behaviour of financial institutions under different monetary regimes. The results show that both deposit and lending rate pass-throughs are incomplete. However, pass-through and speed of adjustment vary across financial institutions and retail rates. This analysis also shows that interest rate adjustments are asymmetric, with more significant adjustments taking place under monetary easing than under monetary tightening. These results provide support for the existence of the interest rate channel of monetary policy in Malaysia. There is thus a need to conduct effective monetary operations to support efficient monetary transmission in Malaysia.     

Is There a Bank Lending Channel in Southern African Banking Systems?

Abstract: Macroeconomic models currently used by policymakers generally assume that the functioning of financial markets can be fully summarized by financial prices, because the Modigliani and Miller (1958) theorem holds. However, the assumption that this theorem holds is questionable. This paper argues that there are frictions in the market which traditional models based on the Modigliani and Miller theorem fail to take into account in explaining how monetary policy and other shocks are transmitted to the economy and points to new directions. A comprehensive macroeconomic model should incorporate financial market interactions to enhance the understanding of the transmission mechanisms of monetary policy and other shocks. If market dynamics are not taken into account, macroeconomic models used by policymakers may point to wrong policy choices. Motivated by the lack of assessment of the recently launched financial reforms, deregulation, consolidations, financial innovations and joint payment systems, the paper assesses the process of monetary transmission mechanism by investigating evidence of a bank lending channel in SADC during the period 1990–2006 using data from the banking sector. Data from a panel of banks is used to identify shifts in the loan supply curve in response to changes in monetary policy using a vector autoregression (VAR) model. Although the results are mixed the paper generally reports the existence of a bank‐lending channel in all SADC countries in the sample. The take‐off point for monetary policy effects differs from one country to another.     

Does bank competition affect the transmission mechanism of monetary policy through bank lending channel? Evidence from India

This paper empirically investigates how intensified competition in the Indian banking affects the transmission of monetary policy through bank lending channel over the period 1997–2017. Additionally, this study examines the impact of deposit and loan market channels on bank’s credit growth. Results obtained through two-step system-GMM reveal that a higher degree of market power weakens the monetary policy transmission mechanism for the entire banking industry and across ownerships. Results show that higher market power in the deposit and loan markets weakens the impact of monetary policy on bank loan supply. The findings of this study extend important policy measures that can strengthen the transmission mechanism of monetary policy by reducing the adverse effects of changes in bank competition.     

Monetary Policies versus Regulatory Policies: Management of Peer to Peer Market Interest Rates

This paper studies how monetary and regulatory policies manage peer to peer (P2P) interest rates. Based on selected representative monetary and regulatory policies, this paper finds that easy monetary policies reduce the demand for online loans, thus reducing the market's interest rates. Monetary policies may increase the supply of online loans through rational expectation channels or reduce the demand for online loans through bank risk‐taking channels. Normative market‐based regulatory policy enables the P2P market to return to rationality, eliminates high‐risk investors and borrowers, and subsequently reduces market interest rates. Risk disposal‐based regulatory policy reduces market supply to some extent, resulting in a small increase in interest rates. Both easy monetary policies and regulatory policies have a great impact on the normal platforms. The interest rate of high‐risk platforms is less affected by the relevant policies, which is evidence that such platforms do not behave in accordance with the financial rules in general. Monetary policies mainly affect platforms with interest rates in a relatively normal range, while regulatory policies mainly focus on platforms with abnormal interest rates.     

Why do commercial banks hold government bonds? The case of Japan

We investigate the determinants of the demand for Japanese government bonds (JGBs) by commercial banks in Japan. In particular, by estimating portfolio equations for JGB demand and bank loans, based on a panel data set from the late 1990s to the 2000s, we rigorously test the popular assertion that the long stagnation of the real economy caused a shift in the portfolios of commercial banks from bank lending to JGBs. We find that the popular assertion is not empirically supported. Rather, the portfolio shift from loans to JGBs has been caused by a fall in the ratio of the loan rate to unit lending costs, or the bank’s price–cost margin for lending.     

Does a large loss of bank capital cause Evergreening? Evidence from Japan

Using the real estate lending share of the bank’s loan portfolio at the peak of the land-price bubble as an instrument for bank capital, we identify the impact of capital adequacy on the allocation of bank lending under the Basel regulatory framework. We find that, in Japan, a large loss of bank capital caused by the regulator’s excessively tough stance towards banks not only induced the contraction of the bank lending supply but also the banks’ reallocation of their lending portfolios to financially unhealthy industries with a higher concentration of non-performing loans.     

Bank dependency on foreign funding and global liquidity shocks: The importance of US monetary policy for a developing country

We examine international spillover effects of US monetary policy on bank lending in Cambodia, using unique data about loan disbursements and the funding structures of Cambodian banks from 2013Q1 to 2019Q2. The banking sector in a developing country is likely dependent on foreign funding, while the dependency could be the source of vulnerability to international monetary and economic conditions. We empirically document that US monetary policy is likely to be transmitted to Cambodian bank lending through foreign funding. We also document that Cambodian banks change their risk-taking behavior in response to the spillover effects of US monetary policy. Furthermore, these results are robust for US monetary policy, but weak and not robust for the monetary policies of the Cambodian bank’s major shareholders’ home countries, suggesting that US monetary policy should be primarily taken into account in supervising banks that are reliant on foreign funding, in addition to domestic economic conditions.