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Bank Losses, Monetary Policy and Financial Stability-Evidenceon the Interplay From Panel Data

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Author Info

  • Lea Zicchino
  • Erlend Nier

Abstract

We assess the extent to which loan losses affect banks’ provision of credit to companies and households and examine how feedback from losses to a reduction in credit is affected by the monetary policy stance. Using a unique cross-country dataset of more than 600 banks from 32 countries, we find that losses lead to a reduction in credit and that this effect is more pronounced when either initial bank capitalization is thin or when monetary policy is tight. Moreover, in the face of credit losses, ample capital is more important in cushioning the effect of loan losses when monetary policy is tight. In other words, capital buffers and accommodating monetary policy act as substitutes in offsetting the adverse effect of losses on loan growth. While most of these effects are stronger in crisis times, we find them to operate both in and outside full-blown banking crises. These findings have important implications for the interplay between financial stability and monetary policy, which this paper also draws out.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/232.

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Length: 30
Date of creation: 01 Sep 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/232

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Related research

Keywords: Financial stability; Bank credit; Liquidity management; Banking crisis; Capital flows; monetary policy; banking; banking crises; bank capital; bank loan; banking system; bank lending; inflation; central bank; bank crisis; bank losses; bank balance sheet; loan loss provision; transmission of monetary policy; tight monetary policy; loose monetary policy; banks ? balance sheets; monetary fund; return on equity; monetary transmission; monetary response; monetary transmission mechanism; bank financing; monetary conditions; bank capitalization; banks ? balance sheet; income statement; bank of england; banking panics; monetary economics; bank balance sheets; bank investments; banking systems; bank policy; bank size; monetary stance; evergreening; bank asset; basel accord; systemic banking crisis; bank finance; bank lending behavior; nonperforming loan; banking institutions; monetary authorities; liability management; bank liabilities; banks loan; bank objectives; bank liquidity;

References

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  1. Yener Altunbas & Leonardo Gambacorta & David Marqués, 2007. "Securitisation and the bank lending channel," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 653, Bank of Italy, Economic Research and International Relations Area.
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Citations

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Cited by:
  1. Mora, Nada & Logan, Andrew, 2010. "Shocks to bank capital: evidence from UK banks at home and away," Bank of England working papers, Bank of England 387, Bank of England.
  2. Rudiger Ahrend & Antoine Goujard, 2012. "International Capital Mobility and Financial Fragility - Part 3. How Do Structural Policies Affect Financial Crisis Risk?: Evidence from Past Crises Across OECD and Emerging Economies," OECD Economics Department Working Papers 966, OECD Publishing.
  3. Xavier Freixas, 2009. "Post crisis challenges to bank regulation," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1201, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Erlend Nier, 2009. "Financial Stability Frameworks and the Role of Central Banks," IMF Working Papers 09/70, International Monetary Fund.
  5. Benjamin Miranda Tabak, 2013. "Financial Stability and Monetary Policy - The case of Brazil," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 67(4), pages 403-413, November.

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