Banks’ lending behavior and monetary policy: evidence from Sweden

Abstract

The main purpose of this paper is to investigate the aggregate data about bank loans which may hide significant information about the monetary transmission mechanism. This study, by disaggregating bank loans data and using the relevant interest rates in Sweden, investigates the behaviour of banks after a monetary policy tightening. By using an unrestricted VAR model and impulse response analysis, our results show that a shock on the policy rate affects the main components of the banks' loan portfolios differently. Initially, banks do not reduce lending to firms and households and they present a sluggish reaction concerning the relevant interest rates. On the contrary, they reduce lending to mortgage credit institutions significantly since real estate lending can be considered as a risky long-term investment. Moreover mortgage credit institutions reduce lending for housing purposes to non-bank public. This reduction is mainly driven by flexible rate loans and loans secured on tenant owned apartments. Consequently, theses actions have a significant effect on real economic activity, by amplifying the initial shock from the tightening monetary policy. The latter result provides evidence of the bank lending channel in Sweden working via mortgage lending and could be very important for policy makers.

A Bank Lending Channel that is working via Housing or via Consumer Loans? Evidence from Europe

“…On the one hand, this effect is much stronger in UK and Sweden. The latter result for Sweden is in accordance with previous work by Papadamou and Siriopoulos (2012) that studied lending decisions of commercial banks to housing institutions. On the other hand, the effect is weaker for the case of France and Italy, indicating a smaller role of housing loans in monetary transmission.…”

“…VAR models can trace out the responses of the endogenous variables due to a shock on a series of financial variables. Additionally, these types of models can adapt the dynamic effects of a shock; functioning as a proxy of the true data-generating process (Papadamou and Siriopoulos, 2012). Additionally, the VAR approach recognizes the simultaneous relation between macroeconomic developments.…”

“…Moreover, special attention should be paid on household loans given the fact that the necessary condition for the existence of a bank lending channelthe specialness of bank credit-holds for households since they lack access to other forms of credit than bank loans. While first studies investigating empirically bank lending channel assumed lenders heterogeneitysmall capitalized illiquid banks versus large capitalized banks -(see for instance Kashyap and Stein, 2000), recently there is few papers assuming heterogeneity among borrowers in order to investigate any evidence for an active bank lending channel (see Escriva and Haldane, 1994;Dale and Haldane, 1995;Swank, 1998, 2003;Kuppers, 2001;Papadamou and Siriopoulos, 2012). The latter studies are mainly focused on a single country and disaggregate total loans to two main categories household and corporate loans.Among others, Buttiglione and Ferri (1994), Guender and Moersch (1997), Dedola and Lippi (2005), argue that disaggregate data are better than aggregate, giving more precise information and depictions of the economy.…”

“…Moreover, Iacovielo (2004) argued that the nominal interest rate is clearly important in determining the initial affordability of a mortgage for a given house value. Moving one step forward, Papadamou and Siriopoulos (2012) reveal the role of mortgage loans in bank lending channel in Sweden, by investigating banks' loan portfolios. On the other hand, consumer credit can have significant effect in countries where economy is mainly based on consumption growth.…”

The effect of the market-based monetary policy transparency index on inflation and output variability

“…Vector autoregressive (VAR) models can trace out the responses of the endogenous variables due to a shock in a series of variables. In addition, these types of model can incorporate the dynamic effects of a shock, functioning as a proxy of the true data-generating process (Papadamou and Siriopoulos 2012). Moreover, the VAR approach recognizes the simultaneous relation between macroeconomic developments.…”