Role of bank heterogeneity and market structure in transmitting monetary policy via bank lending channel: empirical evidence from Chinese banking sector

Usman Bashir, Yu Yugang and Muntazir Hussain

Post-Communist Economies, 2020, vol. 32, issue 8, 1038-1061

Abstract: This study investigates how market structure affects the transmission of monetary policy through the policy’s effects on the bank lending channel in the Chinese banking system. By using structural and nonstructural measures of market structure, we also examined how bank responses are affected by heterogeneity. An unbalanced panel was constructed for 122 Chinese banks using annual data from 2000 to 2014. A dynamic model using two-step system GMM gave results indicating that, for both structural and nonstructural measures, banks with greater market power and increased concentration in the market tend to weaken the monetary policy transmission via the bank lending channel. This result holds while accounting for different bank characteristics such as size, liquidity, and capitalisation. In the Chinese banking market, banks which are well capitalised and have good liquidity position are much more insulated from any shifts in monetary policy because they have alternative sources of funds and have buffers of capital to meet the bank loan supply needs. Ownership structure also plays an important role in weakening the transmission effect through the bank lending channels of joint-equity and city commercial banks. These results are shown to be robust by considering an alternative measure of monetary policy.

Date: 2020
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DOI: 10.1080/14631377.2019.1705082

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