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Borrowers' financial constraints and the transmission of monetary policy: evidence from financial conglomerates

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  • Adam B. Ashcraft
  • Murillo Campello

Abstract

Building on recent evidence concerning the functioning of internal capital markets in financial conglomerates, we conduct a novel test of the balance-sheet channel of monetary policy. Specifically, we investigate how the response of lending to monetary policy differs across small banks that are affiliated with the same bank holding company but operate in different geographical areas. These banks face similar constraints in accessing internal and external sources of funds, but have different pools of borrowers. Because they typically concentrate their lending with small local businesses, we can exploit cross-sectional differences in local economic indicators at the time of a policy shock to study whether the strength of borrowers' balance sheets affects the response of bank lending. We find evidence that the negative response of bank loan growth to a monetary contraction is significantly stronger when borrowers have weaker balance sheets.

Suggested Citation

  • Adam B. Ashcraft & Murillo Campello, 2002. "Borrowers' financial constraints and the transmission of monetary policy: evidence from financial conglomerates," Staff Reports 153, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:153
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    References listed on IDEAS

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    2. Linda Allen & Anthony Saunders, 2004. "Incorporating Systemic Influences Into Risk Measurements: A Survey of the Literature," Journal of Financial Services Research, Springer;Western Finance Association, vol. 26(2), pages 161-191, October.
    3. Bhaumik, Sumon Kumar & Dang, Vinh & Kutan, Ali M., 2011. "Implications of bank ownership for the credit channel of monetary policy transmission: Evidence from India," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2418-2428, September.
    4. Gambacorta, Leonardo, 2005. "Inside the bank lending channel," European Economic Review, Elsevier, vol. 49(7), pages 1737-1759, October.
    5. Oscar Landerretche Moreno, 2007. "Creation and Destruction: Evidence from an Emerging Market," Working Papers wp246, University of Chile, Department of Economics.
    6. Yongil Jeon & Stephen M. Miller, 2004. "The Geographic Distribution of the Size and Timing of Monetary Policy Actions," Working papers 2004-22, University of Connecticut, Department of Economics.
    7. Bojan Markovic, 2006. "Bank capital channels in the monetary transmission mechanism," Bank of England working papers 313, Bank of England.

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    Keywords

    Bank loans; Capital market; Monetary policy;
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