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The bank lending channel revisited

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  • Piti Disyatat

Abstract

A central proposition in research on the role that banks play in the transmission mechanism is that monetary policy imparts a direct impact on deposits and that deposits, insofar as they constitute the supply of loanable funds, act as the driving force of bank lending. This paper argues that the emphasis on policy-induced changes in deposits is misplaced. A reformulation of the bank lending channel is proposed that works primarily through the impact of monetary policy on banks' balance sheet strength and risk perception. Such a recasting implies, contrary to conventional wisdom, that greater reliance on market-based funding enhances the importance of the channel. The framework also shows how banks, depending on the strength of their balance sheets, could act either as absorbers or amplifiers of shocks originiating in the financial system.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 297.

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Length: 37 pages
Date of creation: Feb 2010
Date of revision:
Handle: RePEc:bis:biswps:297

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Keywords: systemic risk; Macroprudential regulation; Portfolio distress loss; Credit default swap; Dynamic conditional correlation;

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  8. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
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