Effect of Monetary Policy on Commercial Banks Across Different Business Conditions

Abstract

The objective of the paper is to investigate whether the stock price reactions of commercial banks to monetary policy actions are dependent on the state of the economy. The results indicate that monetary policy actions have asymmetric effects on the returns of commercial banks across different monetary policy and business environments. The asymmetric effects can primarily be attributed to the asymmetric effects of monetary policy on discount rates across different monetary and business environments. We also observe that the impact of monetary policy on the returns of commercial banks is affected by bank-specific characteristics. Bank size, leverage and profitability play an important role in explaining the cross-sectional variation in bank returns as a result of monetary policy changes. We find that cross-sectional bank-specific characteristics affect the bank returns asymmetrically as a result of monetary policy changes across different business conditions. The results suggest that the effectiveness of monetary policy depends on the states of the economy (JEL: E52, E58, G14, G21).

Interest Rate and Foreign Exchange Sensitivity of Bank Stock Returns: Evidence from China

“…The Pacific Basin markets of Hong Kong, Singapore, South Korea and Taiwan are found to be less efficient in responding to macroeconomic policies than the markets of industrialized countries (Lee (1997)). Harun, Hassan and Zaher (2005) discovered that the different effects of monetary policy are associated with bank size, leverage and profitability. In the context of China's banking system, the announcement of benchmark interest rate adjustment merely tends to increase the volatility of the city commercial banks' stock.…”

Monetary transmissions mechanism for Islamic capital markets: evidence from Markov switching dynamic regression approach

“…We find few studies that explore the effectiveness of monetary policy for dual banking economies (El Alaoui et al , 2019; Omer, 2019; Selim and Hassan, 2019; Caporale et al , 2020). There are other studies (Hassan et al , 1998; Harun et al , 2005; Harun et al , 2008; Mamun and Hassan, 2014; Ashraf et al , 2017) that explore the monetary policy for other countries. Nevertheless, to the best of our knowledge, no study has made use of dynamic models to assess the association between monetary policy rate and Islamic index prices.…”