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Bank efficiency and the bank lending channel: new evidence

Richard Adjei Dwumfour, Eric Fosu Oteng-Abayie and Emmanuel Kwasi Mensah
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Richard Adjei Dwumfour: University of Ghana Business School
Eric Fosu Oteng-Abayie: Kwame Nkrumah University of Science and Technology
Emmanuel Kwasi Mensah: University of Insubria

Empirical Economics, 2022, vol. 63, issue 3, No 11, 1489-1542

Abstract: Abstract We test the bank lending channel of monetary policy in Africa and examine the role of bank cost efficiency in this relationship. We use the stochastic metafrontier approach to estimate cost efficiency scores of 447 commercial banks in Africa. The fixed effect (FE) estimator is used as the baseline estimation method. The 2SLS instrumental variables (IV) and two-step system GMM approaches are used as main estimation techniques to control for endogeneity. The results consistently show the existence of the bank lending channel in Africa: thus, bank credit responds to changes in monetary policy rate. Again, we find strong evidence to show that higher cost efficiency leads to higher loan growth. The results further show that cost-efficient banks are less responsive to monetary policy shocks. The evidence suggests that bank cost efficiency weakens the bank lending channel. This implies that the effect of monetary policy on bank lending depends not only on bank size, capitalization, and liquidity as espoused in the literature but also on bank efficiency. The results are robust in formal sample-splitting. Policy implications are discussed.

Keywords: Bank efficiency; Monetary policy; Bank lending channel; Stochastic metafrontier; Africa (search for similar items in EconPapers)
JEL-codes: B22 E50 E52 G21 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s00181-021-02166-5

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