Balance sheet strength and the bank-lending channel: evidence from an emerging market

Supriya Kapoor
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Supriya Kapoor: UCD Geary Institute for Public Policy

No 201709, Working Papers from Geary Institute, University College Dublin

Abstract: The bank lending channel view of monetary policy argues that bank loan supply should fall during periods of tight monetary policy. Employing a sample of over 122 Indian commercial banks for the period between 2005-17, we investigate the role of cross-sectional heterogeneity in bank balance sheet strength in the effectiveness of bank lending channel. We show that both small and large banks with liquid balance sheets are able to maintain their supply of loans during periods of tight monetary policy. Furthermore, we find that higher capital ratios can also enable banks to maintain their loan supply, in particular among smaller financial institutions. The mechanism at play is a time deposits insulation channel, whereby banks with strong balance sheets can raise time deposits during periods of contractionary monetary policy.

Keywords: bank lending channel; time deposits; monetary policy; liquidity (search for similar items in EconPapers)
JEL-codes: E50 E52 G21 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2017-11-09
New Economics Papers: this item is included in nep-ban, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ucd:wpaper:201709

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