Bank Market Power and Monetary Policy Transmission

Abstract

This paper examines empirically the role of bank market power as an internal factor influencing banks' reaction in terms of lending and risk-taking to monetary policy impulses. The analysis is carried out for the US and euro-area banking sectors over the period 1997-2010. Market power is estimated at the bank-year level, using a method that allows the efficient estimation of marginal cost of banks also at the bank-year level. The findings show that banks with even moderate levels of market power are able to buffer the negative impact of a monetary policy change on bank loans and credit risk. This effect is somewhat more pronounced in the euro area compared to the US. However, following the subprime mortgage crisis of 2007, the level of market power needed to shield bank loans and credit risk from the impact of a change in monetary policy increased substantially. This is clear evidence that the financial crisis reinforced the mechanisms of the bank lending and the risk-taking channels.

Does competition influence the bank lending channel in the euro area?

“…These results differ from those of Brissimis et al (2012) who obtain significant coefficients for the terms indicating monetary policy interaction with capitalization and liquidity, for banks in euro area countries. This difference may derive from differences in estimation methodology or in time periods.…”

“…This result obtains both when we include and exclude the monetary-policy interaction terms for the other bank-specific characteristics, so that we do obtain evidence for the existence of a bank lending channel in the euro area via bank competition. Brissimis et al (2012) also present evidence for this finding. Contrary to the earlier literature, it is bank competition rather than the traditional bank characteristics (size, liquidity, capitalization) that drives the differences in banks' responses to monetary policy changes.…”

“…Brissimi and Delis (2010) also provide some related evidence that heterogeneity at the bank level, defined by differences in market power proxied by the Rosse-Panzar measure, can influence the response of banks to changes in monetary policy in a dataset mixing US and European banks from 1994 to 2007. Brissimis et al (2012) analyze the impact of bank market power on the reaction of banks in terms of lending and of risk-taking following monetary policy changes. On a large set of banks from 12 European countries and the US for the period 1997-2010.…”

“…However, few studies examine how the bank lending channel might have been modified during the crisis (Gambacorta and Marques-Ibanez, 2011). Brissimis et al (2012) also provide estimations related to this issue. However we extend their work, while differing from it in many aspects.…”

Central bank independence, financial supervision structure and bank soundness: An empirical analysis around the crisis

“…This results not only on a limited number of observations, but most importantly on loss of information about important bank characteristics. For example, the literature suggests that the influence of monetary policy and micro-prudential regulations on banking outcomes varies across different levels of bank size and market power (Kashyap and Stein, 2000;Agoraki et al, 2011;Zaheer et al, 2013;Brissimis et al, 2014). Within this context, the use of bank-level data in the present study allows us to examine whether the effect of regulatory structures and central bank independence on risk-taking differs between banks of different size.…”