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Bank heterogeneity and monetary policy transmission

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  • Brissimis, Sophocles N.
  • Delis, Manthos D.

Abstract

Heterogeneity in the response of banks to a change in monetary policy is an important element in the transmission of this policy through banks. This paper examines the role of bank liquidity, capitalization and market power as internal factors influencing banks’ reaction in terms of lending and risk-taking to monetary policy impulses. The ultimate impact of a monetary policy change on bank performance is also considered. The empirical analysis, using large panel datasets for the United States and the euro area, elucidates the sources of differences in the response of banks to changes in policy interest rates by disaggregating down to the individual bank level. This is achieved by the use of a Local GMM technique that also enables us to quantify the degree of heterogeneity in the transmission mechanism. It is argued that the extensive heterogeneity in banks’ response identifies overlooked consequences of bank behavior and highlights potential monetary sources of the current financial distress. JEL Classification: E44, E52, G21, C14

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1233.

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Date of creation: Aug 2010
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Handle: RePEc:ecb:ecbwps:20101233

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Keywords: Bank heterogeneity; bank performance; monetary policy; Risk-taking;

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References

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  1. Douglas W. Diamond & Raghuram G. Rajan, 2006. "Money in a Theory of Banking," American Economic Review, American Economic Association, vol. 96(1), pages 30-53, March.
  2. Demirguc, Asli & Huizinga, Harry, 1999. "Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence," World Bank Economic Review, World Bank Group, vol. 13(2), pages 379-408, May.
  3. Dell''Ariccia, Giovanni & Marquez, Robert, 2005. "Lending Booms and Lending Standards," CEPR Discussion Papers 5095, C.E.P.R. Discussion Papers.
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Cited by:
  1. Agur, Itai & Demertzis, Maria, 2012. "Excessive bank risk taking and monetary policy," Working Paper Series 1457, European Central Bank.
  2. Itai Agur & Maria Demertzis, 2010. "Monetary Policy and Excessive Bank Risk Taking," DNB Working Papers 271, Netherlands Central Bank, Research Department.
  3. Ekin Ayse Ozsuca & Elif Akbostanci, 2012. "An Empirical Analysis of the Risk Taking Channel of Monetary Policy in Turkey," ERC Working Papers 1208, ERC - Economic Research Center, Middle East Technical University, revised Dec 2012.
  4. Delis, Manthos D & Kouretas, Georgios, 2010. "Interest rates and bank risk-taking," MPRA Paper 20132, University Library of Munich, Germany.
  5. Vasilis Droucopoulos & Panagiotis Chronis, 2010. "“Assessing market dominance”: a comment and an extension," Working Papers 109, Bank of Greece.
  6. Itai Agur & Maria Demertzis, 2011. ""Leaning Against the Wind" and the Timing of Monetary Pollicy," DNB Working Papers 303, Netherlands Central Bank, Research Department.

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