Main Article Content
Abstract
Purpose ─ This study aims to identify the role of the bank capital channel by investigating how monetary policy affects bank lending through its influence on bank equity capital in the transmission of monetary policy.
Method ─ The panel vector autoregression (pVAR) is employed to investigate the complex relationship between monetary policy shocks, bank capital, and lending behavior.
Results ─ The main findings are as follows: 1) The study finds evidence of both the bank lending and bank capital channels in South Asia. The analysis reveals a Granger causality between changes in bank capital position and policy rate adjustments, indicating a dynamic interplay between these variables. 2) The findings suggest that although the direct effects of capital position changes on bank lending appear negligible, a nuanced examination uncovers the moderating influence of capital position changes on the impact of policy rate fluctuations on lending behavior. 3) The study suggests that healthier banking systems weaken the bank lending channel in South Asia.
Implication ─ The research sheds light on the mechanism involved in the interplay between monetary policy, bank capital, and lending, providing valuable insights for policymakers and future research directions.
Originality ― This study seeks to fill a gap in the existing literature that offers limited evidence regarding the bank capital channel of monetary policy transmission mechanism, especially within the context of the South Asian region.
Keywords
Article Details
Copyright (c) 2024 Khalil Ullah Mohammad, Mohsin Raza Khan
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References
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References
Altunbas, Y., Gambacorta, L., Marques-ibanez, D., Borio, C., Cecchetti, S., Davis, R., Detken, C., Disyatat, P., Mccauley, R., Neri, S., Nikolov, K., Ongena, S., & Pill, H. (2009). Does monetary policy affect bank risk-taking ? Economics Letters, 31.
Angelopoulou, E., & Gibson, H. D. (2009). The balance sheet channel of monetary policy transmission: Evidence from the United Kingdom. Economica, 76(304), 675–703. https://doi.org/10.1111/j.1468-0335.2008.00710.x
Aramonte, S., Lee, S. J., & Stebunovs, V. (2022). Risk taking and low longer-term interest rates: Evidence from the U.S. syndicated term loan market. Journal of Banking and Finance, 138, 105511. https://doi.org/10.1016/j.jbankfin.2019.02.010
Badarau-Semenescu, C., & Levieuge, G. (2010). Assessing the Potential Strength of a Bank Capital Channel in Europe: a Principal Component Analysis. Review of Finance & Banking, 2(1), 5–16. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=60101780&site=ehost-live
Bernanke, B. S., & Gertler, M. (1995). Inside the Black Box: The Credit Channel of Monetary Policy Transmission. Journal of Economic Perspectives, 9(4), 27–48. https://doi.org/10.1257/jep.9.4.27
Bernanke, B. S., Gertler, M., & Gilchrist, S. (1999a). Chapter 21 The financial accelerator in a quantitative business cycle framework. In Handbook of Macroeconomics (Vol. 1, Issue PART C, pp. 1341–1393). https://doi.org/10.1016/S1574-0048(99)10034-X
Bernanke, B. S., Gertler, M., & Gilchrist, S. (1999b). Chapter 21 The financial accelerator in a quantitative business cycle framework. In Handbook of Macroeconomics (Vol. 1, Issue PART C, pp. 1341–1393). https://doi.org/10.1016/S1574-0048(99)10034-X
Bhatia, S. (2023). Bank capital channel of monetary policy: panel data evidence for India. Indian Economic Review. https://doi.org/10.1007/s41775-023-00173-0
Black, L. K., Hancock, D., & Passmore, S. W. (2010). The Bank Lending Channel of Monetary Policy and its Effect on Mortgage Lending. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1895500
Bluedorn, J. C., Bowdler, C., & Koch, C. (2017). Heterogeneous bank lending responses to monetary policy: New evidence from a real-time identification. International Journal of Central Banking. https://doi.org/10.5089/9781484356760.001
Bonfim, D., & Soares, C. (2018). The Risk-Taking Channel of Monetary Policy: Exploring All Avenues. Journal of Money, Credit and Banking, 50(7), 1507–1541. https://doi.org/10.1111/jmcb.12500
Brissimis, S. N., Delis, M. D., & Iosifidi, M. (2014). Bank market power and monetary policy transmission. International Journal of Central Banking, 10(4), 173–213. https://doi.org/10.2139/ssrn.2858468
Brissimis, S. N., Kamberoglou, N. C., & Simigiannis, G. T. (2021). Is There a Bank Lending Channel of Monetary Policy in Greece? Evidence from Bank Level Data. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.356643
Cantú, C., Lobato, R., López, C., & López-Gallo, F. (2022). A loan-level analysis of financial resilience in Mexico. Journal of Banking and Finance, 135, 105951. https://doi.org/10.1016/j.jbankfin.2020.105951
Chami, R., & Cosimano, T. F. (2010). Monetary policy with a touch of Basel. Journal of Economics and Business. https://doi.org/10.1016/j.jeconbus.2009.12.001
Chami, R., Cosimano, T. F., & Fullenkamp, C. (2001). Capital Trading, Stock Trading, and the Inflation Tax on Equity. Review of Economic Dynamics. https://doi.org/10.1006/redy.2001.0129
Choi, W. G., & Cook, D. (2004). Liability dollarization and the bank balance sheet channel. Journal of International Economics, 64(2), 247–275. https://doi.org/10.1016/j.jinteco.2003.08.009
Connolly, M. (2018). The real effects of stress testing. Working Paper.
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, 101301. https://doi.org/10.1016/j.ribaf.2020.101301
De Bondt, G. (2011). Credit Channels and Consumption in Europe: Empirical Evidence. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.850106
Eser, F., & Schwaab, B. (2016). Evaluating the impact of unconventional monetary policy measures: Empirical evidence from the ECB[U+05F3]s Securities Markets Programme. Journal of Financial Economics, 119(1), 147–167. https://doi.org/10.1016/j.jfineco.2015.06.003
Favero, C., Giavazzi, F., & Flabbi, L. (1999). The transmission mechanism of monetary policy in Europe: evidence from banks’ balance sheets. National bureau of economic research Cambridge, Mass., USA.
Froot, K. A., & Stein, J. C. (1998). Risk management, capital budgeting, and capital structure policy for financial institutions: An integrated approach. Journal of Financial Economics, 47(1), 55–82. https://doi.org/10.1016/S0304-405X(97)00037-8
Fuertes, A. M., Heffernan, S., & Kalotychou, E. (2010). How do UK banks react to changing central bank rates? Journal of Financial Services Research. https://doi.org/10.1007/s10693-009-0056-9
Gambacorta, L., & Marques-Ibanez, D. (2011a). 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
Gambacorta, L., & Marques-Ibanez, D. (2011b). The bank lending channel: Lessons from the crisis. Economic Policy, 26(66). https://doi.org/10.1111/j.1468-0327.2011.00261.x
Gambacorta, L., & Mistrulli, P. E. (2004a). Does bank capital affect lending behavior? Journal of Financial Intermediation, 13(4), 436–457. https://doi.org/10.1016/j.jfi.2004.06.001
Gambacorta, L., & Mistrulli, P. E. (2004b). Does bank capital affect lending behavior? Journal of Financial Intermediation, 13(4), 436–457. https://doi.org/10.1016/j.jfi.2004.06.001
Gambacorta, L., Mistrulli, P. E., Bernanke, B. S., Gertler, M., Stein, J. C., Kashyap, A. K., Kishan, R. P., Opiela, T. P., Bernanke, B. S., & Heuvel, S. Van den. (2000). The financial accelerator and the credit channel. Social Science Research Network, 9(4), 27–48. https://doi.org/10.1016/j.jfi.2004.06.001
Ghosh, T. (2019). The Sectoral Impact of Monetary Policy Transmission in India: A Panel VAR Approach. Emerging Economy Studies, 5(1), 63–77. https://doi.org/10.1177/2394901519826705
Gibson, H. D., Hall, S. G., & Tavlas, G. S. (2016). The effectiveness of the ECB’s asset purchase programs of 2009 to 2012. Journal of Macroeconomics, 47, 45–57.
Girotti, M. (2021). How monetary policy changes bank liability structure and funding cost. Oxford Economic Papers. https://doi.org/10.1093/oep/gpz058
González-Aguado, C., & Suarez, J. (2015). Interest rates and credit risk. Journal of Money, Credit and Banking, 47(2–3), 445–480. https://doi.org/10.1111/jmcb.12182
Gropp, R., & Heider, F. (2010). The determinants of bank capital structure. Review of Finance, 14(4), 587–622. https://doi.org/10.1093/rof/rfp030
Janjua, P. Z., Rashid, A., & Ain, Q.-U.-. (2014). Impact of Monetary Policy on Bank's Balance Sheet in Pakistan. International Journal of Economics and Finance. https://doi.org/10.5539/ijef.v6n11p187
Jiménez, G., Ongena, S., Peydró, J.-L., Saurina, J., Aghion, P., Arellano, M., Berg, A., Bhattacharya, S., Black, L., Campa, M., Carey, M., Cecchetti, S., Detragiache, E., Dell’ariccia, G., Dinger, V., Galati, G., Guimaraes, P., Hart, O., Hartmann, P., … Trichet, J.-C. (2014). Hazardous Times for Monetary Policy: What Do Twenty-Three Million Bank Loans Say About the Effects of Monetary Policy on Credit Risk-Taking? Econometrica, 82(2), 463–505. https://doi.org/10.3982/ecta10104
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
Kishan, R. P., & Opiela, T. P. (2000a). Bank Size, Bank Capital, and the Bank Lending Channel. Journal of Money, Credit and Banking, 32(1), 121. https://doi.org/10.2307/2601095
Kishan, R. P., & Opiela, T. P. (2000b). Bank Size, Bank Capital, and the Bank Lending Channel. Journal of Money, Credit and Banking, 32(1), 121. https://doi.org/10.2307/2601095
Loupias, C., Savignac, F., & Sevestre, P. (2012). Is There a Bank Lending Channel in France? Evidence from Bank Panel Data. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1728744
Meh, C. A., & Moran, K. (2010). The role of bank capital in the propagation of shocks. Journal of Economic Dynamics and Control. https://doi.org/10.1016/j.jedc.2009.10.009
Milne, A. K. L., & Wood, G. E. (2011). The Bank Lending Channel Reconsidered. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1346361
Mohammad, K. U. (2020). The Bank Capital Channel of Monetary Policy: Evidence from Countries with Mixed Banking Systems. International Journal of Islamic Economics and Governance, 1(2), 53–64.
Muduli, S., & Behera, H. (2023). Bank capital and monetary policy transmission in India. Macroeconomics and Finance in Emerging Market Economies, 16(1), 32–56. https://doi.org/10.1080/17520843.2021.1918461
Nguyen, T. P., & Dinh, T. T. H. (2022). The role of bank capital on the bank lending channel of monetary policy transmission: An application of marginal analysis approach. Cogent Economics and Finance, 10(1). https://doi.org/10.1080/23322039.2022.2035044
Nozawa, Y., & Qiu, Y. (2021). Corporate bond market reactions to quantitative easing during the COVID-19 pandemic. Journal of Banking and Finance, 133, 106153. https://doi.org/10.1016/j.jbankfin.2021.106153
Orzechowski, P. E. (2019). The bank capital channel and bank profits. Review of Financial Economics, 37(3), 372–388. https://doi.org/10.1002/rfe.1054
Peek, J., & Rosengren, E. S. (2005a). Unnatural selection: Perverse incentives and the misallocation of credit in Japan. In American Economic Review (Vol. 95, Issue 4, pp. 1144–1166). https://doi.org/10.1257/0002828054825691
Peek, J., & Rosengren, E. S. (2005b). Unnatural selection: Perverse incentives and the misallocation of credit in Japan. In American Economic Review. https://doi.org/10.1257/0002828054825691
Popov, A. (2013). Monetary Policy, Bank Capital and Credit Supply: A Role for Discouraged and Informally Rejected Firms. Social Science Research Network. https://doi.org/10.2139/SSRN.2327702
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