THE BANK LENDING CHANNEL REVISITED: EVIDENCE FROM INDONESIA

Wahyoe Soedarmono, Iman Gunadi (), Sudiro Pambudi () and Tika Nurhayati
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Iman Gunadi: Bank Indonesia
Sudiro Pambudi: Bank Indonesia

No WP/04/2021, Working Papers from Bank Indonesia

Abstract: In this paper, we analyze the effectiveness of the bank lending channel in Indonesia. Our findings highlight that the bank lending channel occurs with a time lag of two quarters. In other words, monetary policy tightening deteriorates bank loan growth two quarters ahead. Moreover, we also find that the presence of the bank lending channel is conditional on the extent to which credit crunch may occur. Specifically, bank loan growth two quarters ahead is negatively affected by monetary policy tighthening when funding liquidity and undisbursed loans decrease. Hence, higher funding liquidity and undisbursed loans depicting credit crunch can impede the bank lending channel. In addition, we highlight that a decline in loan growth two quarters ahead following monetary policy tightening is partly attributed to a decline in bank capital ratio, supporting the bank capital channel hypothesis. Eventually, strengthening bank capital management is essential for the effectiveness of the bank lending channel, while other measures than monetary policy expansions are also worth considering to boost bank lending, particularly in times of credit crunch.

Keywords: Bank lending channel; credit crunch; bank capitalization; Indonesia (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2021
New Economics Papers: this item is included in nep-mon and nep-sea
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