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

Jose Eduardo Gomez-Gonzalez (Escuela Internacional de Ciencias Económicas y Administrativas, Universidad de La Sabana, Chía, Colombia)
Ali Kutan (Department of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, Illinois, USA)
Jair N. Ojeda-Joya (Department of Research, Banco de la Republica de Colombia, Bogota, Colombia)
Camila Ortiz (Department of Economics, Universidad de los Andes, Bogota, Colombia)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 5 May 2020

Issue publication date: 22 June 2021

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

Acknowledgements

The authors want to thank the Editor of the journal and three anonymous referees for providing comments which were very useful for improving the document.

Citation

Gomez-Gonzalez, J.E., Kutan, A., Ojeda-Joya, J.N. and Ortiz, C. (2021), "Does the financial structure of banks influence the bank lending channel of monetary policy? Evidence from Colombia", International Journal of Emerging Markets, Vol. 16 No. 4, pp. 765-785. https://doi.org/10.1108/IJOEM-08-2019-0664

Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited