Does the financial structure of banks influence the bank lending channel of monetary policy? Evidence from Colombia

Jose Gomez-Gonzalez, Ali Kutan, Jair N. Ojeda-Joya and Camila Ortiz

International Journal of Emerging Markets, 2020, vol. 16, issue 4, 765-785

Abstract: Purpose - This paper tests the impact of the financial structure of banks on the bank lending channel of monetary policy transmission in Colombia. Design/methodology/approach - We use a monthly panel of 51 commercial banks for the period 1996:4–2014:8. Findings - An increase in the monetary policy interest rate significantly reduces bank loan growth. The magnitude of this effect depends on banks’ financial structure. Additionally, we identify an asymmetric effect in which the bank lending channel is stronger in monetary contractions than during expansions. We show that this behavior is due to the heterogeneous response of banks with different levels of solvency. This finding has important implications for the design and implementation of monetary policy and coordination of central bank’s policy with key economic agents. Practical implications - The fact that the BLC is stronger in times of monetary contraction is quite interesting for central banking, as it shows that monetary policy transmission is harder during macroeconomic downturns. When investment plans are depressed, monetary stimulus may prove insufficient to reactivate credit demand. This has proven to be true in advanced economies after a strong recession and our results suggest that is also true in emerging market economies for economic downturns in general. Central banks may have to provide stronger shocks to reactivate private credit when the economy is facing a slow economic recovery. Originality/value - Our findings point out that an increase in the monetary policy interest rate significantly reduces bank loan growth. However, the magnitude of this effect critically depends on two aspects. First, bank heterogeneity matters. Particularly, the loan supply of better capitalized banks is less sensitive to monetary policy shocks. Second, the response of credit supply to shifts in short-term interest rates critically depends on the monetary policy stance. The BLC is stronger in times of monetary contraction than during expansions. Moreover, we show that this asymmetric behavior is due to the heterogeneous response of banks with different levels of solvency to the monetary policy stance.

Keywords: Monetary policy transmission; Bank lending channel; Bank financial structure; Solvency; Heterogeneous effects; Colombia; E5; E52; E59; G21 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoemp:ijoem-08-2019-0664

DOI: 10.1108/IJOEM-08-2019-0664

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