Bank loan portfolios and the Canadian monetary transmission mechanism

Haan, Wouter J. Den; Sumner, Steven; Yamashiro, Guy M.

doi:10.1111/j.1540-5982.2009.01542.x

Cited by 15 publications

(1 citation statement)

References 28 publications

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“…They conclude that financial fragility is closely related to the equilibrium composition of banks' loan portfolio. From an empirical point of view, Haan, Sumner, and Yamashiro (2009) illustrate the differing responses that different credit categories (mortgage, business) exhibit after a monetary policy shock in Canada. They conclude that the composition of credit is therefore crucial to understand the transmission mechanisms of monetary policy.…”

Section: Related Literaturementioning

confidence: 99%

The role of capital requirements and credit composition in the transmission of macroeconomic and financial shocks

Valencia¹,

Osório²,

Garay³

2017

Ensayos sobre Política Económica

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a b s t r a c tThis paper builds a general equilibrium model that incorporates a bank, borrowing constraints, default and an exogenous capital requirement to study the effect of the latter on the composition of bank funding and on the response of the economy to shocks. Ex-ante heterogeneous households decide how much to save or borrow for the sake of consumption (consumer credit) or the provision of housing services(mortgages). These choices are subject to borrowing limits, which depend on the value of real estate assets (for mortgages) or labour income (for consumer loans). The model includes a final good producer and a continuum of intermediate goods producers who must borrow in order to finance working capital/labour requirements (business credit borrowing) and are subject to nominal rigidities. Saving and borrowing are intermediated by a bank facing exogenous capital requirements that differ for each credit category. Capital requirements are modelled as a penalty function following Den Haan and De Wind (2012). The paper focuses on the response of the model economy to monetary, productivity and financial shocks with or without capital requirements. In the absence of capital requirements, any shock that reduces the deposit rate will incentivize the bank to switch away from bank capital into deposits, thus increasing the demand for deposits and dampening the effect of the shock on interest rates and the price of housing services. The main effect of capital requirements in the model is to disrupt the ability of the bank of switching to cheaper funding sources (deposits) after a shock. Capital requirements thus have the effect of amplifying the response of aggregate variables to shocks through the composition of the right-hand side of the balance-sheet of the bank, and not through the well-studied channel of leverage constraints affecting its left-hand side.

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Section: Related Literaturementioning

confidence: 99%