# A. Bank lending channel

The bank lending channel has been extensively studied empirically, at least as regards the effect of changes in bank liquidity conditions. There is intense debate about whether this channel can be identified with macroeconomic data – given the difficulty of separating factors driving demand from those driving supply. Some studies look at credit market indicators, such as the ratio between bank lending and commercial paper, showing that tighter monetary policy leads to a decline of the ratio (Kashyap et al (1993) and Ludvigson (1998)). Oliner and Rudebusch (1996) argue that a change in the mix of finance can capture the bigger decline in the amount of credit granted to small firms compared with large firms. Others question the potency of the bank lending channel in relation to monetary policy, especially for the United States. Some studies argue that since banks can accumulate deposits by issuing money market liabilities, such as certificates of deposits, monetary policy has a limited impact on bank lending (see Romer and Romer (1989) and Ramey (1993)). A number of studies, though, find evidence supporting the relevance of the bank lending channel.<sup>39</sup> Other work finds that the bank lending channel plays a role for small banks but has a limited overall impact. Kashyap and Stein (2000), using US bank data, find the impact of monetary policy on lending to be stronger for banks with less liquid balance sheets, with the pattern largely attributable to smaller banks. This evidence supports the bank lending channel since these banks are likely to have fewer external financing options. Others question this view (Bernanke (2007)). Given the growing depth and variety of capital markets, they argue that even small banks have gained access to a multitude of funding sources in addition to retail deposits. Moreover, even if the bank lending channel is important for smaller banks, these banks constitute only a minor share of total US lending. Consistently, Lown and Morgan (2002) report results suggesting that while bank lending may play an important role in macroeconomic fluctuations, the magnitude of the bank lending channel for monetary policy changes may be quite small.

Empirical evidence also suggests that the importance of the transmission channels varies by type of loans and changes over time. Recent studies of the bank lending channel attempt to establish which types of bank loan are more likely to be affected by nominal or real shocks. Den Haan et al (2007), employing a reduced-form VAR model to identify monetary policy shocks, find that after a monetary tightening, real estate and consumer loans decline sharply while commercial and industrial (C&I) loans respond positively and often significantly. By contrast, after a non-monetary negative shock, C&I loans decline sharply, while real estate and consumer loans display no decrease. Boivin et al (2011) report that US transmission channels have evolved over time due to structural changes in the economy, particularly in credit markets, and changes in the relationship between monetary policy and expectations formation. As a consequence, monetary policy innovations have had a more muted effect on real activity and inflation in recent decades relative to before 1980.

The potency of this channel also varies across countries and appears to be more influential in bank-dominated systems. In market-based systems, such as those of the United States and the United Kingdom, where the role of capital markets is relatively important, firms and households enjoy a variety of external financing alternatives whereas in bank-based systems, such as those of Germany and Japan, fewer options exist. This implies that the bank lending channel is expected to be more influential.

> 39 See Gertler and Gilchrist (1993, 1994), Friedman and Kuttner (1993), Kashyap and Stein (1995), Peek and Rosengren (1995b) and Kakes and Sturm (2002).

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