Deposit interest rate ceilings as credit supply shifters: Bank level evidence on the effects of Regulation Q |
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Institution: | 1. HEC Montréal, 3000 Chemin de la Côte-Sainte-Catherine, Montréal Québec H3T 2A7, Canada;2. Université de Sherbrooke, 2500 Boulevard de l''Université, Sherbrooke Québec J1K 2R1, Canada |
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Abstract: | How did deposit interest rate ceilings, an important feature of the U.S. regulatory regime until the mid-1980s, affect individual banks’ lending and the transmission of monetary policy to credit? I estimate the effect of deposit rate ceilings inscribed in Regulation Q on commercial banks’ credit growth using a historical bank level data set starting in 1959. Banks’ credit growth contracted sharply when legally fixed deposit rate ceilings were binding. Interaction terms with monetary policy suggest that the policy impact on bank level credit growth was non-linear and significantly larger when rate ceilings were in place. Bank size and capitalization mitigate these effects. At the bank level, short-term interest rates exceeding the legally fixed deposit rate ceilings identify policy induced credit supply shifts that disappeared with deposit rate deregulation and thus weakened the bank lending channel substantially since the early 1980s. |
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Keywords: | Monetary transmission Lending channel Deregulation Regulation Q |
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