# IV. **Conclusions**

This paper finds convincing evidence of the practical importance of the credit channel (more specifically, the bank lending channel) in the monetary transmission mechanism, particularly following the financial crisis. A number of major conclusions can be drawn from the empirical results presented in this paper.

First, as shown in the so-called "narrative" approach to identifying if the bank lending channel is operating (i.e., if the loan supply rather than loan demand effects are identified as being important), bank lending was found to play a significant independent role in amplifying the real effects of tightened monetary policy, which was implemented in response to the crisis (December 1997 episode). Bank lending channel reinforced the dampening effect of tightened monetary policy on real economic activity that would be expected had the policy been transmitted sorely through the interest rate channel. It seems most likely that the transmission mechanism from the financial distress in the banking industry due to the crisis to a decline in the real economic activity presumably have worked largely through a reduction in bank credit to small and medium-sized firms.

Second, when disaggregated bank balance sheet data were used to test for the existence of the loan supply effects over the 1990s, there was a much greater dampening effect on both lending volume and the securities holding of small bank group than those of the large bank group after a tightened monetary policy (i.e., a positive innovation in the call rate). These results would be largely consistent with the testable prediction of the bank lending channel that the sensitivity of both lending volume and securities holding to monetary tightening should be more pronounced for small banks typically facing higher costs in attracting non-deposit sources of external finance and thereby tighter liquidity constraints, just as for their non-financial counterparts (i.e., small and medium-sized firms). Notably, the lending volume for each bank group was found to drop more substantially in response to the crisis shock used as an alternative measure of the severe monetary contraction. This evidence could conceivably suggest the role for the credit crunch that would have occurred in the wake of the crisis, although some definitive test is needed to identify more precisely whether such a larger decline in lending for each bank group in response to the crisis shock is attributable to the diminished loan supply or demand.

Third, empirical investigation of the credit crunch using a disequilibrium model of loan market specifying separate loan demand and supply function revealed an evidence that in the aftermath of the crisis in December 1997, there has occurred a substantial excess demand for bank loans caused by a sharp loan supply decline (i.e., by the credit crunch). It is noteworthy that the credit crunch during the crisis was associated with a pervasive structural shift in bank behavior nationwide that led to a critical impediment to the ordinary functioning of the credit generating mechanism in the banking sector (i.e., a systemic crisis). While the exact source of the structural shift is difficult to identify, it appears most likely that such a structural shift stemmed from the fragile credit market conditions which was under way even before the crisis unfolded. The adverse conditions would invoive an exposure of the banking sector to huge non-performing loans driven predominantly by a wave of major corporate bankruptcies and the consequent desperate 28