Heterogenous impact of monetary policy on the Philippine rural banking system

Abstract

This paper shows the differential impact of monetary policy on the lending behavior of rural banks, with the bank lending channel being operational in small rural banks. While big rural banks are able to protect their lending portfolio from contractionary monetary policy by the size of their balance sheet, small rural banks with less diversified funding portfolio cannot. Moreover, highly capitalized rural banks are more inclined to protect their capital than expand their lending portfolio, following monetary tightening and higher capital requirement. The insignificance of gross domestic product (GDP) growth may reflect weakness in effective loan demand and lack of diversification that could have also impinged on the earning capacity of rural banks, as supported by initial estimates on the drivers of rural bank profitability. The finding on heterogeneous effects of monetary policy on rural banks has a secondary implication of lending credence to the principle of proportionality embodied in the BSP’s bank regulatory framework.

The Bank Lending Channel in Dual Banking Systems: How Market Power Shapes Monetary Policy Effectiveness

“…Ozsuca (2022) explored these effects considering bank size and discovered asymmetric responses; small, liquidity, and capital-constrained banks exhibited significant contractions in lending following monetary policy tightening, whereas larger banks exhibited the opposite behavior. This finding was corroborated by Glindro et al (2022), who observed similar trends between small and large rural banks in the Philippines. Dang & Dang (2021) assessed the effects of monetary policy in a diversified banking landscape and concluded that the efficacy of the monetary policy lending channel diminishes in a banking system where a larger share of income is derived from non-interest activities.…”