A new approach to the analysis of monetary policy transmission through bank capital

Abstract

The purpose of this article is to quantify how bank capital determines the effects of monetary policy on bank lending. Additionally, we test how these effects differ during monetary contractions and expansions. Using a sample of 3,028 European banks between 1999 and 2012, we find that the reduction in loans caused by monetary restrictions is similar across banks regardless of their capital. In addition, during monetary expansions, banks increase their loan supply more as they become better capitalized. Contrary to previous studies, there are differences in the monetary policy transmission through capital only during expansionary monetary regimes. These results are relevant because previous studies have not measured how the marginal effect of monetary policy on the growth of loans varies with the value of capital. We contribute to the existing literature by using a new approach that quantifies this marginal effect, which considerably improves the interpretation of statistical results from models that include continuous variable interactions and allows a better understanding of the role of bank capital in the transmission of monetary shocks.

Bank diversification and the effectiveness of monetary policy transmission: Evidence from the bank lending channel in Vietnam

“…Our result differs from the previous stream revealing that well-capitalized banks tend to weaken the bank lending channel or that the effectiveness of monetary policy transmission does not vary with capitalization level. Most of those studies focus on advanced economies rather than an emerging market like ours (Altunbaş et al, 2002;Gambacorta & Marques-Ibanez, 2011;Jimborean, 2009;Sáiz et al, 2018). However, our finding still lends great support to the notion that the indirect impact of bank characteristics, e.g., bank competition, on the bank lending channel is more pronounced at high-capitalization banks in an emerging economy (Yang & Shao, 2016).…”

“…However, existing literature also shows inconsistencies in the findings. For instance, exploring the European market, some authors display that bank capital does not affect the bank lending channel during the periods of monetary restrictions (Gambacorta & Marques-Ibanez, 2011;Jimborean, 2009;Sáiz et al, 2018), and bank size is generally not crucial for the way a bank modifies its lending to interest rate variations (Ehrmann et al, 2003).…”

“…Previous studies had proposed a number of different indicators to gauge monetary policy stance, most commonly based on short-term interest rates. Accordingly, they compute the change in money market rates (Altunbaş et al, 2009(Altunbaş et al, , 2010Ehrmann et al, 2003;Olivero et al, 2011;Sáiz et al, 2018), treasury bill rates (Khan et al, 2016) or lending rates (Chen et al, 2017;Yang & Shao, 2016), to construct monetary policy indicators, flexibly based on the availability of data in the target markets. Following these frameworks with no consensus on the best indicator, we use shortterm lending rates to gauge overall monetary policy stance in Vietnam.…”

The bank liquidity creation channel of monetary policy transmission in a multiple-instrument environment

“…A large stream of research on the bank lending channel of monetary policy transmission analyses its importance and existence in countries and regions. Additionally, the purpose of some studies is to examine whether this channel depends on bank-level characteristics or the structure of financial markets (Allen et al, 2017;Beutler et al, 2020;Gomez et al, 2020;Hussain and Bashir, 2019;Khan et al, 2016;Sáiz et al, 2018;Yang and Shao, 2016). Most of the related work on the bank lending channel mainly concentrates on advanced markets thanks to the rich dataset such as the USA and Europe.…”

Low interest rates and executive risk-taking incentives: Evidence from the United States

“…However, VegaCEO is a continuous variable and can have infinite values. Therefore, to overcome this limitation, we follow Cantero-Sáiz et al (2018) to analyze how the marginal effect of VegaCEO on the different dependent variables varies with the macroeconomic policies. Figures 1 to 6 report the marginal effects of macroeconomic policies on the level of leverage (Figures 1 and 4), investment (Figures 2 and 5), and stock return volatility (Figures 3 and 6) when there is an increase in the growth of bank loan interest rates (Figures 1 to 3) and in the difference between the 10 year and 6 month treasury interest rates and (Figures 4 to 6).…”