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.     

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.     

Does Government Intervention Affect Banking Globalization?

Using data from British and American banks, we provide empirical evidence that government intervention affects the global activities of individual banks along three dimensions: depth, breadth and persistence. We examine depth by studying whether a bank's preference for domestic, as opposed to external, lending (funding) changes when it is subjected to a large public intervention, such as bank nationalization. Our results suggest that, following nationalization, non-British banks allocate their lending away from the UK and increase their external funding. Second, we find that nationalized banks from the same country tend to have portfolios of foreign assets that are spread across countries in a way that is far more similar than those of either private bank from the same country or nationalized banks from different countries, consistent with an impact on the breadth of globalization. Third, we study the Troubled Asset Relief Program (TARP) to examine the persistence of the effect of large government interventions. We find weak evidence that upon entry into the TARP, foreign lending declines but domestic does not. This effect is observable at the aggregate level, and seems to disappear upon TARP exit. Collectively, this evidence suggests that large government interventions affect the depth and breadth of banking globalization, but may not persist after public interventions are unwound.     

Does government intervention affect banking globalization?

Using data from British and American banks, we provide empirical evidence that government intervention affects the global activities of individual banks along three dimensions: depth, breadth and persistence. We examine depth by studying whether a bank's preference for domestic, as opposed to external, lending (funding) changes when it is subjected to a large public intervention, such as bank nationalization. Our results suggest that, following nationalization, non-British banks allocate their lending away from the UK and increase their external funding. Second, we find that nationalized banks from the same country tend to have portfolios of foreign assets that are spread across countries in a way that is far more similar than those of either private banks from the same country or nationalized banks from different countries, consistent with an impact on the breadth of globalization. Third, we study the Troubled Asset Relief Program (TARP) to examine the persistence of the effect of large government interventions. We find weak evidence that upon entry into the TARP, foreign lending declines but domestic does not. This effect is observable at the aggregate level, and seems to disappear upon TARP exit. Collectively, this evidence suggests that large government interventions affect the depth and breadth of banking globalization, but may not persist after public interventions are unwound.     

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.     

Bank lending and the business cycle: Does ownership matter in ASEAN countries?

We analyze the lending cyclicality of 213 ASEAN commercial banks over the period 2001–2015. The findings indicate that lending by private banks is procyclical while lending by state banks is countercyclical. Long-term liabilities also move countercyclically for state banks whereas funding for non-state banks in the form of deposit and long-term liabilities is procyclical. Greater lending cyclicality is observed for both private and state banks in Cambodia, Myanmar, Laos, and Vietnam (CMLV) compared to Indonesia, Malaysia, the Philippines, Thailand, and Singapore (ASEAN-5). Lending of non-ASEAN based foreign banks shows greater procyclicality than that of domestic banks for the ASEAN-5 countries, although not for the CMLV countries. During the global financial crisis, lending by non-ASEAN based foreign banks contracted sharply even as lending by ASEAN based foreign banks was unaffected. Overall, our results confirm that bank ownership influences lending and funding sensitivity to economic fluctuations.     

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.     

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.     

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.     

Responding to financial crisis: Bank credit expansion with Chinese characteristics

China has sustained a high rate of economic growth even after the outbreak of global financial crisis around 2008 and 2009. Much of the growth stemmed from consistently high levels of lending after this period. Using a unique large dataset from all banking institutions in 90 counties across 14 provinces of China from 2005 to 2013, this paper examines the patterns of credit expansion by Chinese banks. Our study results reveal a clear pattern of counter-cyclical credit expansion by Chinese banks in response to the outbreak of global financial crisis. We find that ownership structure and bank governance do impact on bank lending: the large state-owned banks have responded more to political pressure to lend while the joint-stock banks and city commercial banks have been more profit oriented. The latter had increased their lending more to increase their presence at the county markets. Overall, compared with county-based small banks, cross-regional banks have expanded their lending much more aggressively. Differences in liquidity and deposit growth, risk management strategies, or legal enforcement cannot explain these results.     

Bank Lending and Economic Growth of Chinese Cities

Using a city-level dataset over the period 2004-2006,the present study investigates the relationship between bank lending and the economic growth of Chinese cities.Unlike past studies,we divide bank lending into loans from three types of banks:foreign banks,city banks and other banks.Our findings are threefold.First,the lending of foreign banks exhibits a strong and positive association with the economic growth of Chinese cities. Second,foreign direct investment in the sampled cities enhances the lending effects of foreign banks,but reduces the lending effects of other banks on the economy of Chinese cities.Third, the effects of city competitiveness are similar to those of foreign direct investment;that is,city competitiveness augments the lending effects of foreign banks but reduces the lending effects of other banks.     

Effect of CEO power and board strength on bank performance in China

Given that a powerful CEO is more likely to overcome problems and control performance in a firm, this study first focuses on exploring whether CEO power positively affects certain measures of bank performance and which sources of CEO power have these positive impacts. Next, this study further analyzes whether the positive impact of CEO power on performance is negatively mediated by board strength. Our sample includes data on the three main types of Chinese banks for 2006 to –2016.Our results show that CEO structural power significantly improves a bank’s overall profitability, risk-taking ability and lending quality, CEO ownership power significantly raises a bank’s lending quality, and CEO expert power significantly increases a bank’s overall and shareholder profitability. As considering the endogeneity, CEO prestige power significantly improves a bank’s overall profitability. Next, we use the proportion of independent directors as our measure of board strength and find that a stronger board reduces the beneficial effects of CEO structural power on a bank’s lending quality, of CEO ownership power on shareholder profitability, and of CEO expert power on lending quality. There are similar harmful mediating effects when we use the proportion of foreign investors and board size as measures of board strength. Our results can help Chinese bank authorities develop policies to appropriately raise bank CEOs’ power and reduce board supervision of CEO power.     

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.     

Heterogeneity in lending and sectoral growth: evidence from German bank-level data

This paper investigates whether heterogeneity across firms and banks matters for the impact of domestic sectoral growth on bank lending. We use several bank-level datasets provided by the Deutsche Bundesbank for the 1996–2002 period. Our results show that firm heterogeneity and bank heterogeneity affect how lending responds to domestic sectoral growth. We document that banks’ total lending to German firms reacts pro-cyclically to domestic sectoral growth, while lending exceeding a threshold of €1.5 million to German and foreign firms does not. Moreover, we document that the response of lending depends on bank characteristics such as the banking groups, the banks’ asset size, and the degree of sectoral specialization. We find that total domestic lending by savings banks and credit cooperatives (including their regional institutions), smaller banks, and banks that are highly specialized in specific sectors responds positively and, in relevant cases, more strongly to domestic sectoral growth.

Bank Lending and Business Cycles: South African Evidence

Abstract: The paper provides empirical analysis on the linkage between the behavior of bank lending and business cycles in South Africa. Consistent with theory, overall evidence suggesting pro‐cyclicality of bank lending is uncovered both at macro and micro levels. At macro level, bank lending and lending rates have moved in tandem with business cycles. Real borrowing by government was counter‐cyclical to business cycles as would be expected if the role of government was to fine‐tune the economy during booms and recessions. At micro level, bank lending to households and firms was generally pro‐cyclical. Even the growth of provisioning by banks has been largely pro‐cyclical to business cycles, though exceptions were recorded. First, new mortgage lending exhibited counter‐cyclical behavior before 1993. We attributed this behavior to the political and economic climate prevailing then which created uncertainties that made ownership of property a good hedge against economic and political risks. Secondly, the growth of real credit for investment and of foreign trade finance does not appear to have been related to business cycles.     

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.     

How do leverage ratios affect bank share performance during financial crises: The Japanese experience of the late 1990s

This study investigates the relationship between leverage ratios and bank share performance for a sample of Japanese banks during the period of financial crisis in the late 1990s. We differentiate between two types of leverage ratios: book leverage and market leverage. We show that market leverage instead of book leverage observed before the crisis has statistically and economically significant predictive power for the cross-sectional variation in bank performance during the crisis, even after controlling for a variety of other indicators reflecting bank’s characteristics and financial conditions. We also find that banks with lower market leverage ratios were affected more adversely by the failure announcements of large financial institutions during the crisis. The results are robust across alternative model specifications, statistical methodologies, lengths of sample intervals, and measures of bank share performance during the crisis. Our results therefore have important implications for regulators in identifying distressed banks that are vulnerable to the deterioration in conditions of the financial system.     

The effectiveness of bank recapitalization policies in Japan

This study examines the effectiveness of bank recapitalization policies in Japan. Based on a reading of the “business revitalization plan” submitted by banks requesting government funds, we identify four primary goals for the capital injection plan in Japan: (1) to increase the bank capital ratios; (2) to increase write-offs of non-performing loans; (3) to increase lending, in particular to small and medium enterprises, in order to avoid a “credit crunch”; (4) to encourage restructuring. Using a panel of individual bank data, we empirically estimate the effectiveness of the Japanese government policy of public fund injection in achieving the first three of these stated goals. Our empirical analysis reveals that, in general, the capital injections into the large internationally active banks were more effective than those into the smaller domestic banks in Japan. In addition, the second round capital injection, administered in 1998, was more effective than the first round, administered in 1997. The first capital injection in 1997 mostly served as a stop-gap measure to help the large international banks clear the 8% capital adequacy ratio (BIS ratio) required under the Basel Accord and did not make much contribution to the other policy objectives. The second round of capital injections in 1998 were more effective, boosting capital adequacy ratios for the domestic as well as international banks and supporting other policy objectives as well by stimulating banks to write off bad loans and increase domestic lending, in particular to small and medium enterprises.     

Credit policy,real exchange rate volatility and moral hazard

We extend the well-developed theoretical literature on unconventional credit policy from a closed economy to a small open economy. Consistent with the literature, we find that credit policy has positive effects on output and consumption by raising investment demand. In terms of expanding output, it is more effective to extend government credit to banks than to the goods-producing sector because for each unit of credit supplied to banks, banks - through leverage - can supply greater than one unit of intermediation to firms. We find the welfare implications are ambiguous and depend on the type of policy chosen. A policy of providing funds to goods-producing firms tends to be welfare-improving because it dampens the responses of all variables after a negative shock, including the real exchange rate. However, providing government assistance to the banking sector may be a costly policy because it encourages greater risk-taking on part of banks, leading to higher bank leverage. All else equal, this increases the volatility of the economy, raising the variances of consumption and of the real exchange rate, which is welfare-deteriorating. We interpret this as indicative of the problem of moral hazard associated with a policy of providing support to failing banks.     

No lending relationships and liquidity management of small businesses during a financial shock

We investigate the determinants of the end of lending relationships with banks using small business data. We also investigate how small businesses without lending relationships financed credit demand during the global financial shock. First, we find that firms with lower growth, low working capital, and high internal cash were more likely to end lending relationships with banks. Supply-side effects on the determinants of the end of relationships are insignificant. Second, when firms experienced credit demand during the financial shock, those with lending relationships increased bank borrowings while those without lending relationships reduced internal cash. Third, firm performance (in terms of profitability) was neither lower nor higher for firms that did not have lending relationships with banks during the shock period.