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Central Bank Policy: Theory and Practice
Type: Book
ISBN: 978-1-78973-751-6

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Article
Publication date: 23 April 2020

Muntazir Hussain, Usman Bashir and Ahmad Raza Bilal

The purpose of this paper is to investigate the risk-taking channel of monetary policy transmission in the Chinese banking industry. This study also investigates the role…

Abstract

Purpose

The purpose of this paper is to investigate the risk-taking channel of monetary policy transmission in the Chinese banking industry. This study also investigates the role of various other factors in the risk-taking channel.

Design/methodology/approach

This study used panel data from 2000 to 2012, and a dynamic panel model (Difference GMM) was applied.

Findings

The empirical findings of this paper suggest that loose monetary policy rates increase bank risk-taking. Unlike previous studies, the results of this paper suggest that the bank-specific factors (size, liquidity and capitalization) do not significantly affect the risk-taking channel. However, the market structure does have a stabilizing effect on monetary policy transmission and the risk-taking channel. Higher market power weakens the risk-taking channel of monetary policy transmission.

Practical implications

Of significance to the policymakers' point of view is that loose monetary policy induces banks to take excessive risks. However, such effects can be mitigated by encouraging a proper level of market power in banking markets.

Originality/value

This study investigated the risk-taking channel of monetary policy transmission for the Chinese banking industry. Due to the unique features of the People's Bank of China (PBC, Central Bank of China) policy, this study also contributes to the literature by comparing price-based and quantity-based monetary policy tools and their effectiveness in financial stability and monetary policy transmission. Furthermore, the role of market structure is also investigated in the risk-taking channel.

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International Journal of Emerging Markets, vol. 16 no. 4
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 5 May 2020

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

This paper tests the impact of the financial structure of banks on the bank lending channel of monetary policy transmission in Colombia.

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.

Details

International Journal of Emerging Markets, vol. 16 no. 4
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 14 October 2019

Mohamed Aseel Shokr

This paper aims to examine the effectiveness of monetary policy on bank loans in Egypt using generalized method of moments (GMM) model. Also, it investigates the impact of…

Abstract

Purpose

This paper aims to examine the effectiveness of monetary policy on bank loans in Egypt using generalized method of moments (GMM) model. Also, it investigates the impact of bank level variables, namely, total assets, liquidity, capital and income on bank loans. It develops the equation of loans, which is introduced by Ehrmann et al. (2002) using bank level variables such as income and the interaction between income and interest rate.

Design/methodology/approach

This paper examines the impact of monetary policy shocks on bank loans in Egypt by applying the GMM technique and panel data from 1996 to 2014.

Findings

The results reveal that real interest rate has a significant impact on bank loans, which indicates that the bank lending channel is effective in Egypt. Furthermore, the bank level variables, namely, banks’ size, liquidity and income have significant effects on bank loans in Egypt, which sustains the heterogeneous effect of monetary policy on bank loans. Therefore, the Central Bank of Egypt (CBE) can adjust interest rate to influence the bank loans and total demand.

Research limitations/implications

It does not examine the effect of monetary policy on small and large banks in Egypt.

Practical implications

The policy implications from this paper indicate that the monetary authority in Egypt should adjust interest rate to stabilize the bank loan supply. By stabilizing the bank loans, the monetary authority is able to stabilize investment, consumption and total demand.

Social implications

The relevance of bank lending channel indicates that the role of commercial banks is very important in transmitting monetary policy shocks to the real sector.

Originality/value

It is important for the CBE, banks and people because it shows the effectiveness of bank lending channel and the effect of global financial crisis on the Egyptian economy.

Details

Journal of Financial Economic Policy, vol. 12 no. 2
Type: Research Article
ISSN: 1757-6385

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Book part
Publication date: 4 March 2015

Rustam Jamilov

I contribute to the ongoing policy discourse on the challenges of monetary policy transmission in environments with consolidated financial sectors and high credit rates. I…

Abstract

I contribute to the ongoing policy discourse on the challenges of monetary policy transmission in environments with consolidated financial sectors and high credit rates. I empirically investigate the lending rate pass-through in Azerbaijan – a small resource-rich economy in transition – by taking advantage of a unique set of high-frequency bank-level data. My bottom-line policy message is the following. First, lending rates are considerably irresponsive to monetary policy shocks, and the interest rate channel ought to be somehow improved. Second, macroeconomic fundamentals and the concentrated bank sector are surprisingly not among the reasons behind the policy-market disconnect. Third, domestic commercial banks are able to exert substantial monopolistic pricing capacities and keep credit rates high, particularly when the central bank loosens its policy stance. Fourth, the underlying cause of both monetary policy inefficacy and high interest rate stickiness appears to be structural excess liquidity. In fact, empirical results show that pass-through is substantially higher for less liquid banks. Extraction of excess liquidity from the system should mitigate the banks’ monopolistic pricing powers, improve the efficiency of the interest rate channel, and ultimately bring the credit rates down.

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Book part
Publication date: 1 October 2014

Roseline Nyakerario Misati, Alfred Shem Ouma and Kethi Ngoka-Kisinguh

All over the world, the role of central banks is being redefined following the outbreak of the global financial crisis and subsequent breakdown of the “great moderation”…

Abstract

All over the world, the role of central banks is being redefined following the outbreak of the global financial crisis and subsequent breakdown of the “great moderation” consensus. Consequently, most advanced economies adopted non-conventional approaches of monetary policy which resulted in spill-overs to emerging markets and developing countries with implications on their financial system and monetary policy transmission. This, coupled with, internal developments in the financial systems of developing countries necessitated modifications of not only monetary policy frameworks but also responsibilities of most central banks. This chapter acknowledges possible evolutions of the financial structure variables in developing countries and uses data from Kenya to analyze the dynamic linkages between financial sector variables and monetary policy transmission in the light of the financial crisis. The study used structural vector autoregression to examine the relationship between financial structure variables and monetary policy as well as assess the relative importance of various monetary transmission channels in Kenya. The results show that the changing financial structure represented by credit to the private sector and stock market indicators in Kenya only slightly altered relative importance of monetary policy transmission. The insignificance of credit to the private sector suggests that the importance attached to the bank lending channel in previous studies is waning while the marginal significance of the stock market indicator signals the potential for asset price channel. The results also indicate that the interest rate and exchange rate channels are relatively more important in Kenya while the asset prices is only marginally significant and bank lending channel is the weakest in the intermediate stage of monetary policy transmission. However, transmission of monetary policy to the ultimate objectives is somewhat slow and weak to inflation and almost absent to output. The result implies a limited role of monetary policy on growth and questions the wisdom of pursuing multiple objectives.

Details

Risk Management Post Financial Crisis: A Period of Monetary Easing
Type: Book
ISBN: 978-1-78441-027-8

Keywords

Content available
Article
Publication date: 23 January 2020

Kevin Nooree Kim and Ani L. Katchova

Following the recent global financial crisis, US regulatory agencies issued laws to implement the Basel III accords to ensure the resiliency of the US banking sector…

Abstract

Purpose

Following the recent global financial crisis, US regulatory agencies issued laws to implement the Basel III accords to ensure the resiliency of the US banking sector. Theories predict that enhanced regulations may alter credit issuance of the regulated banks due to increased capital requirements, but the direction of changes might not be straightforward especially with respect to the agricultural loans. A decrease in credit availability from banks might pose a serious problem for farmers who rely on bank credit especially during economic recessions. The paper aims to discuss these issues.

Design/methodology/approach

In this study, the impact of Basel III regulatory framework implementation on agricultural lending in the USA is examined. Using panel data of FDIC-insured banks from 2008 to 2017, the agricultural loan volume and growth rates are examined for agricultural banks and all US banks.

Findings

The results show that agricultural loan growth rates have slowed down, but the amount of agricultural loan volume issuance still remained positive. More detailed examination finds that regulated agricultural banks have decreased both the agricultural loan volume and their loan exposure to the agricultural sector, showing a possible sign of credit crunch.

Originality/value

This study examines whether the implementation of the Basel III regulation has resulted in changes in agricultural loan issuance by US banks as predicted by the lending channel theory.

Details

Agricultural Finance Review, vol. 80 no. 3
Type: Research Article
ISSN: 0002-1466

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Article
Publication date: 9 November 2015

Anthony Simpasa, Boaz Nandwa and Tiguéné Nabassaga

– The purpose of this paper is to explore the effect of monetary policy on the lending behaviour of commercial banks in Zambia using bank-level data.

Abstract

Purpose

The purpose of this paper is to explore the effect of monetary policy on the lending behaviour of commercial banks in Zambia using bank-level data.

Design/methodology/approach

Dynamic panel data econometric analysis is used to uncover the evidence of monetary transmission mechanism in Zambian banking industry. Other specifications are used as robustness checks.

Findings

Contrary to received evidence, the authors find that the bank lending channel in Zambia operates mainly through large banks. The effect of monetary policy on medium-sized banks is moderate while it is virtually non-existent for smaller banks. Furthermore, the data does not show evidence of relationship lending for smaller banks.

Originality/value

Overall, the findings of this investigation suggest that price signals, rather than quantity aggregates, matter the most in the transmission of monetary policy in Zambia. The results therefore lend support to the central bank’s recent shift in monetary policy framework from using monetary aggregates to interest rate targeting as a means to strengthen effectiveness of monetary policy.

Details

Journal of Economic Studies, vol. 42 no. 6
Type: Research Article
ISSN: 0144-3585

Keywords

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Book part
Publication date: 1 October 2014

Xuan Vinh Vo and Phuc Canh Nguyen

A thorough understanding of transmission mechanism is a key to a successful conduct of monetary policy. This chapter attempts to improve knowledge in this respect by…

Abstract

A thorough understanding of transmission mechanism is a key to a successful conduct of monetary policy. This chapter attempts to improve knowledge in this respect by examining the impacts of commercial bank risks on the transmission of monetary policy. We investigate the impact of monetary policy on bank risk in Vietnam pre and post 2008 global financial crisis employing a unique and disaggregated bank level data set from 2003 to 2012. The results of panel data estimation indicate that the bank lending channel of monetary is evidenced in Vietnam. In addition, we find that the transmission mechanism is affected by characteristics of commercial banks.

Details

Risk Management Post Financial Crisis: A Period of Monetary Easing
Type: Book
ISBN: 978-1-78441-027-8

Keywords

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Article
Publication date: 3 May 2016

Sean Severe

Substantial research has been conducted on the direct effects of banking competition or lack thereof. However, little work has investigated how the market structure of…

Abstract

Purpose

Substantial research has been conducted on the direct effects of banking competition or lack thereof. However, little work has investigated how the market structure of banks can affect the transmission of monetary policy. The purpose of this paper is to investigate to what degree bank concentration dampens or enhances the response of manufacturing to monetary policy changes.

Design/methodology/approach

To test how back concentration affects the transmission of monetary policy onto manufacturing value-added, the author regresses real value-added in manufacturing on bank concentration, monetary policy and the interaction of these two variables. The data set consists of a panel of 22 OECD countries across 59 manufacturing sectors from 1993 to 2005.

Findings

The author finds that bank concentration has two distinct effects: growth in manufacturing is lower in countries with higher concentration and manufacturing is less responsive to monetary policy as well. A loosening of monetary policy by lowering interest rates has a significantly larger effect on growth in countries with lower banking concentration. Overall, a 1 per cent decrease in the monetary policy interest rate increases industrial growth by 0.049 per cent when the three-bank concentration ratio is equal to the sample average, but the same monetary policy change has roughly twice the effect if bank concentration is only 5 per cent lower, all else equal.

Originality/value

The author is the first to measure how bank concentration alters the effectiveness of monetary policy using real economic activity as the output variable. The study is one of very few that has tied together inefficiencies created by bank concentration and the transmission of monetary policy.

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