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The Bank Lending Channel Revisited: Evidence From Indonesia

Author

Listed:
  • Wahyoe Soedarmono
  • Iman Gunadi

    (Bank Indonesia)

  • Sudiro Pambudi

    (Bank Indonesia)

  • Tika Nurhayati

Abstract

In this paper, we analyze the effectiveness of the bank lending channel in Indonesia. Our findings highlight that the bank lending channel occurs with a time lag of two quarters. In other words, monetary policy tightening deteriorates bank loan growth two quarters ahead. Moreover, we also find that the presence of the bank lending channel is conditional on the extent to which credit crunch may occur. Specifically, bank loan growth two quarters ahead is negatively affected by monetary policy tighthening when funding liquidity and undisbursed loans decrease. Hence, higher funding liquidity and undisbursed loans depicting credit crunch can impede the bank lending channel. In addition, we highlight that a decline in loan growth two quarters ahead following monetary policy tightening is partly attributed to a decline in bank capital ratio, supporting the bank capital channel hypothesis. Eventually, strengthening bank capital management is essential for the effectiveness of the bank lending channel, while other measures than monetary policy expansions are also worth considering to boost bank lending, particularly in times of credit crunch.

Suggested Citation

  • Wahyoe Soedarmono & Iman Gunadi & Sudiro Pambudi & Tika Nurhayati, 2021. "The Bank Lending Channel Revisited: Evidence From Indonesia," Working Papers WP/04/2021, Bank Indonesia.
    • Handle: RePEc:idn:wpaper:wp042021
    as

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    References listed on IDEAS

    as
    1. Yu Hsing & Wen-jen Hsieh, 2014. "Test of the Bank Lending Channel for a BRICS Country," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(8), pages 1016-1023.
    2. Olivero, María Pía & Li, Yuan & Jeon, Bang Nam, 2011. "Competition in banking and the lending channel: Evidence from bank-level data in Asia and Latin America," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 560-571, March.
    3. Yu Hsing, 2014. "Test of the bank lending channel: the case of US consumer loans," Applied Economics Letters, Taylor & Francis Journals, vol. 21(7), pages 466-469, May.
    4. Alberto Alesina & Francesco Giavazzi, 2010. "Europe and the Euro," NBER Books, National Bureau of Economic Research, Inc, number ales08-1, March.
    5. repec:agr:journl:v:1(590):y:2014:i:1(590):p:115-120 is not listed on IDEAS
    6. Yu Hsing & Wen-jen Hsieh, 2014. "Test of the Bank Lending Channel for a BRICS Country," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(8), pages 1016-1023, August.
    7. Yu HSING, 2014. "Test of the bank lending channel: The case of Hungary," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(590)), pages 115-120, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Bank lending channel; credit crunch; bank capitalization; Indonesia;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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