We study the monetary-transmission mechanism with a data set that includes quarterly observations of every insured U.S. commercial bank from 1976 to 1993. We find that the impact of monetary policy on lending is stronger for banks with less liquid balance sheets--i.e., banks with lower ratios of securities to assets. Moreover, this pattern is largely attributable to the smaller banks, those in the bottom 95 percent of the size distribution. Our results support the existence of a "bank lending channel" of monetary transmission, though they do not allow us to make precise statements about its quantitative importance.

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What Do a Million Observations on Banks Say about the Transmission of Monetary Policy

Few areas of monetary economics have been studied as extensively as the transmission mechanism. The literature on this topic has evolved substantially over the years, following the waxing and waning of conceptual frameworks and the changing characteristics of the financial system. In this paper, taking as a starting point a brief overview of the extant work on the interaction between capital regulation, the business cycle and the transmission mechanism, we offer some broader reflections on the characteristics of the transmission mechanism in light of the evolution of the financial system. We argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents - what might be termed the "risk-taking channel" of monetary policy. We develop the concept, compare it with current views of the transmission mechanism, explore its mutually reinforcing link with "liquidity" and analyse its interaction with monetary policy reaction functions. We argue that changes in the financial system and prudential regulation may have increased the importance of the risk-taking channel and that prevailing macroeconomic paradigms and associated models are not well suited to capturing it, thereby also reducing their effectiveness as guides to monetary policy.

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Capital Regulation, Risk-Taking and Monetary Policy: A Missing Link in the Transmission Mechanism?

What ties together the traditional commercial banking activities of deposittaking and lending? We argue that since banks often lend via commitments, their lending and deposit-taking may be two manifestations of one primitive function: the provision of liquidity on demand. There will be synergies between the two activities to the extent that both require banks to hold large balances of liquid assets: If deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities can share the costs of the liquid-asset stockpile. We develop this idea with a simple model, and use a variety of data to test the model empirically. WHAT ARE THE DEF INING CHARACTERISTICS of a bank? Both the legal definition in the United States and the standard answer from economists is that commercial banks are institutions that engage in two distinct types of activities, one on each side of the balance sheet—deposit-taking and lending. More precisely, deposit-taking involves issuing claims that are riskless and demandable, that is, claims that can be redeemed for a fixed value at any time. Lending involves acquiring costly information about opaque borrowers, and extending credit based on this information. A great deal of theoretical and empirical analysis has been devoted to understanding the circumstances under which each of these two activities might require the services of an intermediary, as opposed to being implemented in arm’s-length securities markets. While much has been learned from this work, with few exceptions it has not addressed a fundamental question: why is it important that one institution carry out both functions

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Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking

Using data from 1996 to 2000, we investigate the effects of ownership, especially by a strategic foreign owner, on bank efficiency for eleven transition countries in an unbalanced panel consisting of 225 banks and 856 observations. Applying stochastic frontier estimation procedures, we compute profit and cost efficiency scores taking account of both time and country effects directly. In second-stage regressions, we take these efficiency measures along with return on assets as dependent variables with dummy variables for ownership type, a variable controlling for bank size, and dummy variables for year and country effects as explanatory variables. Methodologically, our results demonstrate the importance of including fixed effects, especially country effects, and also suggest a preference for efficiency measures over financial measures of bank performance in empirical work on transition countries. With respect to the impact of ownership, we conclude that privatization by itself is not sufficient to increase bank efficiency as government-owned banks are not appreciably less efficient than domestic private banks. Our results do support the hypothesis that foreign ownership leads to more efficient banks in transition countries. We find that foreign-owned banks are more cost-efficient than other banks and that they also provide better service, in particular if they have a strategic foreign owner. Moreover, the participation of international institutional investors is shown to have a considerable additional positive impact on profit efficiency, which is consistent with the notion that these investors facilitate the transfer of technology and know how to newly privatized banks. In addition, we find that the remaining government-owned banks are less efficient in providing services, which is consistent with the hypothesis that the better banks were privatized first in transition countries. Finally, efficiency declines with bank size, which could call into question government-orchestrated bank consolidation strategies. We conjecture that the presence of many small and efficient foreign greenfield operations in these transition countries may be responsible for this result.

Bank Performance, Efficiency and Ownership in Transitition Countries

Using data from 1996 to 2000, we investigate the effects of ownership, especially by a strategic foreign owner, on bank efficiency for eleven transition countries in an unbalanced panel consisting of 225 banks and 856 observations. Applying stochastic frontier estimation procedures, we compute profit and cost efficiency taking account of both time and country effects directly. In second-stage regressions, we use the efficiency measures along with return on assets to investigate the influence of ownership type. With respect to the impact of ownership, we conclude that privatization by itself is not sufficient to increase bank efficiency as government-owned banks are not appreciably less efficient than domestic private banks. We find that foreign-owned banks are more cost-efficient than other banks and that they also provide better service, in particular if they have a strategic foreign owner. The remaining government-owned banks are less efficient in providing services, which is consistent with the hypothesis that the better banks were privatized first in transition countries.

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Bank performance, efficiency and ownership in transition countries

This paper provides evidence of a credit channel and a bank lending channel of monetary policy in the United States from 1980 to 1995. We test for bank loan supply shifts by segregating banks according to asset size and capital leverage ratio. The loan growth of small (under $300M) undercapitalized (capital-asset ratio 10%) banks is significantly affected by policy. This has important implications for the strength and distributional effects of monetary policy, and for the link between stabilization and regulatory policy. ACCURATELY DEFINING THE ROLE OF BANKS in the transmission of monetary policy may hold the key to explaining the effects of policy on the economy. In the credit channel, banks play a pivotal role in the transmission of policy. Assuming asymmetric information between lenders and borrowers, the credit channel offers an appealing explanation for the strength, timing, and distributional effects of policy on the economy. There are two subchannels within the credit channel that account for the role of banks in transmitting central bank impulses the borrower net worth channel (BNWC) (also known as the balance-sheet channel), and the bank lending channel (BLC). A body of literature over the last decade has tested for the existence of the credit channel and the two subchannels. In this paper we provide evidence in support of the credit channel, in general, and the bank lending channel, in particular.

Bank Size, Bank Capital, and the Bank Lending Channel

Utilizing a bank-lending channel framework, we investigate the effects of expansionary and contractionary policy separately on the loan behavior of low-capital and high-capital banks, and between pre-Basel/FDICIA and post-Basel/FDICIA periods. Our results show that low-capital banks are adversely affected by contractionary policy. Expansionary policy, however, is not effective in stimulating the loan growth of low-capital banks. These results are consistent with lending channel predictions, but only hold in the post-Basel/FDICIA period when the capital constraint is stringent relative to the pre-Basel/FDICIA period. These asymmetric policy results have implications for the interaction of monetary and capital regulatory policies.

Bank capital and loan asymmetry in the transmission of monetary policy

Bank efficiency studies on emerging markets tend to show that foreign banks are more cost-, profit-, and operationally efficient than statE-owned or domestic private banks. They also show that large banks are more efficient than small banks. Using a parametric approach to measuring efficiency, this article finds that foreign banks servicing foreign and business customers are more cost-efficient and less profit-efficient than other banks in Poland. Additionally, evidence of cost economies and profit diseconomies of scale are found. These results have implications for regulatory policies focused on promoting efficiency in the banking systems of emerging markets.

Customer type and bank efficiency in poland: implications for emerging market banking

This paper examines the impact of ownership structure and changes in the deposit insurance system on the market for bank time deposits in Poland. In an environment of less restrictive bank supervision and a deposit insurance policy that favored state banks, we find that depositors exacted a price for risk-taking. After a new law increasing insurance coverage for private banks went into effect, however, bank specific variables became less important in explaining differences in deposit interest rates. We report, however, that the three fully guaranteed state banks pay significantly lower rates than private banks. Moreover, other state-owned banks, with the same explicit guarantee as private banks, pay significantly lower rates than private banks, so it appears that depositors treat these state-owned banks as if they have a larger implicit guarantee.

https://chicagofed.org/~/media/publications/working-papers/1998/wp98-13-pdf.pdf

Bank Time Deposit Rates and Market Discipline in Poland: The Impact of State Ownership and Deposit Insurance Reform

THIS PAPER IDENTIFIES A monetary policy channel that operates through the risk pricing of uninsured bank debt. Testing for the endogeneity of risk pricing to policy shocks is the main focus of this paper. We test for the relation between monetary policy shocks and changes in risk pricing in the market for jumbo certificates of deposit (jumbo CDs) 1 .

Timothy P. Opiela

Papers

Bank Size, Bank Capital, and the Bank Lending Channel

Bank capital and loan asymmetry in the transmission of monetary policy

Customer type and bank efficiency in poland: implications for emerging market banking

Bank Time Deposit Rates and Market Discipline in Poland: The Impact of State Ownership and Deposit Insurance Reform

Monetary Policy, Bank Lending, and the Risk‐Pricing Channel