Main Article Content
Abstract
Purpose ─ The paper empirically explores the conditioning role of loan portfolio diversification in the monetary policy pass-through via the bank lending and risk-taking channels.
Methods ─ Data of Vietnamese commercial banks during 2007–2019 is employed to perform regression using the two-step system generalized method of moments in dynamic panel models. For robustness, we approach different choices of monetary policy indicators, ranging from interest-based tools to quantitative-based policy, and consider a rich set of sectoral exposure measures to proxy loan portfolio diversification.
Findings ─ Lower interest rates or greater liquidity injection during monetary expansion may increase bank lending and bank risk, thus confirming the working of the bank lending and risk-taking channels of monetary policy transmission. Notably, the potency of these banking channels may be weakened for banks diversifying loan portfolios more into various economic sectors.
Implication ─ The findings call for monetary authorities to concentrate on certain types of banks, depending on their loan portfolios when setting monetary policy. When managing banking supervision, banking supervisors should also acknowledge the tradeoff between bank lending and bank risk in response to monetary shocks.
Originality ─ For the first time, this paper explores the conditional role of loan portfolio composition and thus further supports the recent upsurge in empirical studies highlighting the role of business models in monetary policy pass-through.
Keywords
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References
- Acharya, V. V., Hasan, I., & Saunders, A. (2006). Should banks be diversified? Evidence from individual bank loan portfolios. Journal of Business, 79(3), 1355–1412. https://doi.org/10.1086/500679
- Adrian, T., & Shin, H. S. (2010). The changing nature of financial intermediation and the financial crisis of 2007–2009. Annual Review of Economics, 2(1), 603–618. https://doi.org/10.1146/annurev.economics.102308.124420
- Beck, T., De Jonghe, O., & Schepens, G. (2013). Bank competition and stability: Cross-country heterogeneity. Journal of Financial Intermediation, 22(2), 218–244. https://doi.org/10.1016/j.jfi.2012.07.001
- Bernanke, B. S., & Blinder, A. S. (1988). Credit, money, and aggregate demand. American Economic Review, 78, 435–439. https://doi.org/10.1016/S0197-2510(11)70055-9
- Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
- Boot, A. W. A. (2000). Relationship banking: What do we now? Journal of Financial Intermediation, 9(1), 7–25. https://doi.org/10.1006/jfin.2000.0282
- Borio, C., & Zhu, H. (2012). Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism? Journal of Financial Stability, 8(4), 236–251. https://doi.org/10.1016/j.jfs.2011.12.003
- Căpraru, B., Ihnatov, I., & Pintilie, N. L. (2020). Competition and diversification in the European Banking Sector. Research in International Business and Finance, 51. https://doi.org/10.1016/j.ribaf.2018.09.014
- Chen, M., Wu, J., Jeon, B. N., & Wang, R. (2017). Monetary policy and bank risk-taking: Evidence from emerging economies. Emerging Markets Review, 31, 116–140. https://doi.org/10.1016/j.ememar.2017.04.001
- Dang, V. D., & Dang, V. C. (2020). The conditioning role of performance on the bank risk-taking channel of monetary policy: Evidence from a multiple-tool regime. Research in International Business and Finance, 54, 1–19. https://doi.org/10.1016/j.ribaf.2020.101301
- Dang, V. D., & Dang, V. C. (2021). Bank diversification and the effectiveness of monetary policy transmission: Evidence from the bank lending channel in Vietnam. Cogent Economics and Finance, 9(1). https://doi.org/10.1080/23322039.2021.1885204
- Dang, V. D., & Huynh, J. (2021). Bank lending in an emerging economy: How does central bank reserve accumulation matter? Economic Journal of Emerging Markets, 13(1), 53–65. https://doi.org/10.20885/ejem.vol13.iss1.art5
- Delis, M. D., & Kouretas, G. P. (2011). Interest rates and bank risk-taking. Journal of Banking and Finance, 35(4), 840–855. https://doi.org/10.1016/j.jbankfin.2010.09.032
- Den Haan, W. J., Sumner, S. W., & Yamashiro, G. M. (2009). Bank loan portfolios and the Canadian monetary transmission mechanism. Canadian Journal of Economics, 42(3), 1150–1175. https://doi.org/10.1111/j.1540-5982.2009.01542.x
- Gambacorta, L., & Marques-Ibanez, D. (2011). The bank lending channel: Lessons from the crisis. Economic Policy, 26(66), 135–182. https://doi.org/10.1111/j.1468-0327.2011.00261.x
- Hussain, M., & Bashir, U. (2019). Impact of monetary policy on bank lending: Does market structure matter? International Economic Journal, 33(4), 620–648. https://doi.org/10.1080/10168737.2019.1668820
- Huynh, J., & Dang, V. D. (2021). Loan portfolio diversification and bank returns: Do business models and market power matter? Cogent Economics and Finance, 9(1). https://doi.org/10.1080/23322039.2021.1891709
- Kashyap, A. K., & Stein, J. C. (1995). The impact of monetary policy on bank balance sheets. Carnegie-Rochester Confer. Series on Public Policy, 42(C), 151–195. https://doi.org/10.1016/0167-2231(95)00032-U
- Leroy, A. (2014). Competition and the bank lending channel in Eurozone. Journal of International Financial Markets, Institutions and Money, 31(1), 296–314. https://doi.org/10.1016/j.intfin.2014.04.003
- Mamatzakis, E., & Bermpei, T. (2016). What is the effect of unconventional monetary policy on bank performance? Journal of International Money and Finance, 67, 239–263. https://doi.org/10.1016/j.jimonfin.2016.05.005
- Rafique, A., Quddoos, M. U., Ali, S., Aslam, F., & Ahmad, M. (2021). Monetary policy transmission: Balance sheet channel and investment behavior of firms in Pakistan. Economic Journal of Emerging Markets, 13(1), 1–12. https://doi.org/10.20885/ejem.vol13.iss1.art1
- Rajan, R. G. (2006). Has finance made the world riskier? European Financial Management, 12(4), 499–533. https://doi.org/10.1111/j.1468-036X.2006.00330.x
- Sáiz, M. C., Azofra, S. S., Olmo, B. T., & Gutiérrez, C. L. (2018). A new approach to the analysis of monetary policy transmission through bank capital. Finance Research Letters, 24, 199–220. https://doi.org/10.1016/j.frl.2017.07.021
- Varlik, S., & Berument, M. H. (2017). Multiple policy interest rates and economic performance in a multiple monetary-policy-tool environment. International Review of Economics and Finance, 52, 107–126. https://doi.org/10.1016/j.iref.2017.10.004
- Vo, X. V. (2018). Bank lending behavior in emerging markets. Finance Research Letters, 27, 129–134. https://doi.org/10.1016/j.frl.2018.02.011.
References
Acharya, V. V., Hasan, I., & Saunders, A. (2006). Should banks be diversified? Evidence from individual bank loan portfolios. Journal of Business, 79(3), 1355–1412. https://doi.org/10.1086/500679
Adrian, T., & Shin, H. S. (2010). The changing nature of financial intermediation and the financial crisis of 2007–2009. Annual Review of Economics, 2(1), 603–618. https://doi.org/10.1146/annurev.economics.102308.124420
Beck, T., De Jonghe, O., & Schepens, G. (2013). Bank competition and stability: Cross-country heterogeneity. Journal of Financial Intermediation, 22(2), 218–244. https://doi.org/10.1016/j.jfi.2012.07.001
Bernanke, B. S., & Blinder, A. S. (1988). Credit, money, and aggregate demand. American Economic Review, 78, 435–439. https://doi.org/10.1016/S0197-2510(11)70055-9
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
Boot, A. W. A. (2000). Relationship banking: What do we now? Journal of Financial Intermediation, 9(1), 7–25. https://doi.org/10.1006/jfin.2000.0282
Borio, C., & Zhu, H. (2012). Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism? Journal of Financial Stability, 8(4), 236–251. https://doi.org/10.1016/j.jfs.2011.12.003
Căpraru, B., Ihnatov, I., & Pintilie, N. L. (2020). Competition and diversification in the European Banking Sector. Research in International Business and Finance, 51. https://doi.org/10.1016/j.ribaf.2018.09.014
Chen, M., Wu, J., Jeon, B. N., & Wang, R. (2017). Monetary policy and bank risk-taking: Evidence from emerging economies. Emerging Markets Review, 31, 116–140. https://doi.org/10.1016/j.ememar.2017.04.001
Dang, V. D., & Dang, V. C. (2020). The conditioning role of performance on the bank risk-taking channel of monetary policy: Evidence from a multiple-tool regime. Research in International Business and Finance, 54, 1–19. https://doi.org/10.1016/j.ribaf.2020.101301
Dang, V. D., & Dang, V. C. (2021). Bank diversification and the effectiveness of monetary policy transmission: Evidence from the bank lending channel in Vietnam. Cogent Economics and Finance, 9(1). https://doi.org/10.1080/23322039.2021.1885204
Dang, V. D., & Huynh, J. (2021). Bank lending in an emerging economy: How does central bank reserve accumulation matter? Economic Journal of Emerging Markets, 13(1), 53–65. https://doi.org/10.20885/ejem.vol13.iss1.art5
Delis, M. D., & Kouretas, G. P. (2011). Interest rates and bank risk-taking. Journal of Banking and Finance, 35(4), 840–855. https://doi.org/10.1016/j.jbankfin.2010.09.032
Den Haan, W. J., Sumner, S. W., & Yamashiro, G. M. (2009). Bank loan portfolios and the Canadian monetary transmission mechanism. Canadian Journal of Economics, 42(3), 1150–1175. https://doi.org/10.1111/j.1540-5982.2009.01542.x
Gambacorta, L., & Marques-Ibanez, D. (2011). The bank lending channel: Lessons from the crisis. Economic Policy, 26(66), 135–182. https://doi.org/10.1111/j.1468-0327.2011.00261.x
Hussain, M., & Bashir, U. (2019). Impact of monetary policy on bank lending: Does market structure matter? International Economic Journal, 33(4), 620–648. https://doi.org/10.1080/10168737.2019.1668820
Huynh, J., & Dang, V. D. (2021). Loan portfolio diversification and bank returns: Do business models and market power matter? Cogent Economics and Finance, 9(1). https://doi.org/10.1080/23322039.2021.1891709
Kashyap, A. K., & Stein, J. C. (1995). The impact of monetary policy on bank balance sheets. Carnegie-Rochester Confer. Series on Public Policy, 42(C), 151–195. https://doi.org/10.1016/0167-2231(95)00032-U
Leroy, A. (2014). Competition and the bank lending channel in Eurozone. Journal of International Financial Markets, Institutions and Money, 31(1), 296–314. https://doi.org/10.1016/j.intfin.2014.04.003
Mamatzakis, E., & Bermpei, T. (2016). What is the effect of unconventional monetary policy on bank performance? Journal of International Money and Finance, 67, 239–263. https://doi.org/10.1016/j.jimonfin.2016.05.005
Rafique, A., Quddoos, M. U., Ali, S., Aslam, F., & Ahmad, M. (2021). Monetary policy transmission: Balance sheet channel and investment behavior of firms in Pakistan. Economic Journal of Emerging Markets, 13(1), 1–12. https://doi.org/10.20885/ejem.vol13.iss1.art1
Rajan, R. G. (2006). Has finance made the world riskier? European Financial Management, 12(4), 499–533. https://doi.org/10.1111/j.1468-036X.2006.00330.x
Sáiz, M. C., Azofra, S. S., Olmo, B. T., & Gutiérrez, C. L. (2018). A new approach to the analysis of monetary policy transmission through bank capital. Finance Research Letters, 24, 199–220. https://doi.org/10.1016/j.frl.2017.07.021
Varlik, S., & Berument, M. H. (2017). Multiple policy interest rates and economic performance in a multiple monetary-policy-tool environment. International Review of Economics and Finance, 52, 107–126. https://doi.org/10.1016/j.iref.2017.10.004
Vo, X. V. (2018). Bank lending behavior in emerging markets. Finance Research Letters, 27, 129–134. https://doi.org/10.1016/j.frl.2018.02.011.