We study the monetary-transmission mechanism with a data set that includes quarterly observations of every insured U. S. commercial bank from 1976 to 1993. We find that the impact of monetary policy on lending is stronger for banks with less liquid balance sheets-i.e., banks with lower ratios of securities to assets. Moreover, this pattern is largely attributable to the smaller banks, those in the bottom 95 percent of the size distribution. Our results support the existence of a "bank lending channel" of monetary transmission, though they do not allow us to make precise statements about its quantitative importance. (JEL E44, E52, G32)In this paper, we use a new and very big data set to address an old and very basic question, namely: how does monetary policy work? With an almost 20-year panel that includes quarterly data on every insured commercial bank in the United States-approximately 1 million bankquarters in all-we are able to trace out the effects of monetary policy on the lending behavior of individual banks. It is already well known that changes in the stance of monetary policy are followed by significant movements in aggregate bank lending volume (Ben S. Bernanke and Alan S. Blinder, 1992); what we seek to learn here is whether there are also important cross-sectional differences in the way that banks with varying characteristics respond to policy shocks.In particular, we ask whether the impact of monetary policy on lending behavior is stronger for banks with less liquid balance sheets, where liquidity is measured by the ratio of securities to assets. It turns out that the answer is a resounding "yes." Moreover, the result is largely driven by the smaller banks, those in the bottom 95 percent of the size distribution.This empirical exercise is best motivated as a test of the so-called "bank lending view" of monetary transmission. At the heart of the lending view is the proposition that the Federal Reserve can, simply by conducting open-market operations, shift banks' loan supply schedules. For example, according to the lending view, a contraction in reserves leads banks to reduce loan supply, thereby raising the cost of capital to bankdependent borrowers. Importantly, this effect is on top of any increase in the interest rate on openmarket securities such as Treasury bills. 1 The lending view hinges on a failure of the Modigliani-Miller (M-M) proposition for banks. 2

Abstract:In this paper, we propose a bank-based explanation for the decade-long Japanese slowdown following the asset price collapse in the early 1990s. We start with the wellknown observation that

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What ties together the traditional commercial banking activities of deposittaking and lending? We argue that since banks often lend via commitments, their lending and deposit-taking may be two manifestations of one primitive function: the provision of liquidity on demand. There will be synergies between the two activities to the extent that both require banks to hold large balances of liquid assets: If deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities can share the costs of the liquid-asset stockpile. We develop this idea with a simple model, and use a variety of data to test the model empirically.WHAT ARE THE DEF INING CHARACTERISTICS of a bank? Both the legal definition in the United States and the standard answer from economists is that commercial banks are institutions that engage in two distinct types of activities, one on each side of the balance sheet-deposit-taking and lending. More precisely, deposit-taking involves issuing claims that are riskless and demandable, that is, claims that can be redeemed for a fixed value at any time. Lending involves acquiring costly information about opaque borrowers, and extending credit based on this information.A great deal of theoretical and empirical analysis has been devoted to understanding the circumstances under which each of these two activities might require the services of an intermediary, as opposed to being implemented in arm's-length securities markets. While much has been learned from this work, with few exceptions it has not addressed a fundamental question: why is it important that one institution carry out both functions

This paper uses disaggregated data on bank balance sheets to provide a test of the lending view of monetary policy transmission. We argue that if the lending view is correct, one should expect the loan and security portfolios of large and small banks to respond differentially to a contraction in monetary policy. We first develop this point with a theoretical model; we then test to see if the model's predictions are borne out in the data.

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VIRTUALLY ALL ASPECTS of the U. S. banking industry have changed dramatically over the last fifteen years. For instance, over one-third of all independent banking organizations (top-tier bank holding companies and unaffiliated banks) disappeared over the period 1979-94, even Electronic copies of all data in tables Al-AIO are available in machine-readable form from the Wharton Financial Institutions Center,