Bank net worth and frustrated monetary policy

Alexander K. Zentefis

Journal of Financial Economics, 2020, vol. 138, issue 3, 687-699

Abstract: I present a model in which bank net worth determines both loan market competition and monetary transmission to firm borrowing rates. In the model, banks are local monopolists for borrowers near them. When they are flush with equity, banks expand their lending, compete for customers at the edges of their markets, and pass through changes in the monetary policy rate to their loan rates. When they lose substantial equity, banks consolidate, retreat from rivalry, and frustrate monetary transmission. The model explains why interest rate pass-through weakens after financial crises. Its predictions are consistent with several facts about bank-to-firm lending.

Keywords: Banking; Monetary policy; Monopolistic competition (search for similar items in EconPapers)
JEL-codes: E52 G21 L13 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:138:y:2020:i:3:p:687-699

DOI: 10.1016/j.jfineco.2020.06.007

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