Deposit interest rate ceilings as credit supply shifters: bank level evidence on the effects of Regulation Q

Christoffer Koch

No 1406, Working Papers from Federal Reserve Bank of Dallas

Abstract: Shocks emanating from and propagating through the banking system have recently gained interest in the macroeconomics literature, yet they are not a feature unique to the 2008/09 financial crisis. Banking disintermediation shocks occured frequently during the Great Inflation era due to fixed deposit rate ceilings. I estimate the effect of deposit rate ceilings inscribed in Regulation Q on the transmission of federal funds rate changes to bank level credit growth using a historic bank level data set spanning half a century from 1959 to 2013 with about two million observations. Measures of the degree of bindingness of Regulation Q suggest that individual banks? lending growth was smaller the more binding the legally fixed rate ceiling. Interaction terms with monetary policy suggest that the policy impact on bank level credit growth was non-linear at the ceiling ?kink? and significantly larger when rate ceilings were in place. At the bank level, short-term interest rates exceeding the legally fixed deposit rate ceilings identify bank loan supply shifts that disappeared with deposit rate deregulation and thus weakened the credit channel of monetary transmission since the early 1980s.

Keywords: Monetary Transmission; Lending Channel; Regulation Q; Deregulation; Great Moderation (search for similar items in EconPapers)
JEL-codes: E51 E52 E58 G18 G21 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2014-07-14
New Economics Papers: this item is included in nep-ban, nep-cba, nep-his, nep-mac, nep-mon and nep-reg
Note: Published as: Koch, Christoffer (2015), "Deposit Interest Rate Ceilings as Credit Supply Shifters: Bank Level evidence on the Effects of Regulation Q," Journal of Banking & Finance 61: 316-326.
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Citations: View citations in EconPapers (3)

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Journal Article: Deposit interest rate ceilings as credit supply shifters: Bank level evidence on the effects of Regulation Q (2015)
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DOI: 10.24149/wp1406

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