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Monetary policy and bank lending in a low interest rate environment: diminishing effectiveness?

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  • Claudio Borio
  • Leonardo Gambacorta

Abstract

This paper analyses the effectiveness of monetary policy on bank lending in a low interest rate environment. Based on a sample of 108 large international banks, our empirical analysis suggests that reductions in short-term interest rates are less effective in stimulating bank lending growth when rates reach a very low level. This result holds after controlling for business and financial cycle conditions and different bank-specific characteristics such as liquidity, capitalisation, funding costs, bank risk and income diversification. We find that the impact of low rates on the profitability of banks' traditional intermediation activity helps explain the subdued evolution of lending in the period 2010-14.

Suggested Citation

  • Claudio Borio & Leonardo Gambacorta, 2017. "Monetary policy and bank lending in a low interest rate environment: diminishing effectiveness?," BIS Working Papers 612, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:612
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    Cited by:

    1. Apostolos Serletis & Maksim Isakin, "undated". "Banking Technology in a Markov Switching Economy," Working Papers 2018-18, Department of Economics, University of Calgary, revised 15 Nov 2018.
    2. repec:men:journl:v:4:y:2018:i:2:p:143-155 is not listed on IDEAS
    3. repec:rba:rbaacv:acv2017-04 is not listed on IDEAS
    4. Nevin, Ciarán, 2018. "Irish retail bank profitability 2003-20018," Financial Stability Notes 10/FS/18, Central Bank of Ireland.
    5. Richard Varghese, 2018. "The Bank Lending Channel A Time-Varying Approach," IHEID Working Papers 10-2018, Economics Section, The Graduate Institute of International Studies.
    6. Malovaná, Simona & Frait, Jan, 2017. "Monetary policy and macroprudential policy: Rivals or teammates?," Journal of Financial Stability, Elsevier, vol. 32(C), pages 1-16.
    7. Nevin, Ciarán, 2018. "Irish retail bank profitability 2003-20018," Financial Stability Notes 10-18, Central Bank of Ireland.
    8. Claudio Borio & Boris Hofmann, 2017. "Is Monetary Policy Less Effective When Interest Rates Are Persistently Low?," RBA Annual Conference Volume,in: Jonathan Hambur & John Simon (ed.), Monetary Policy and Financial Stability in a World of Low Interest Rates Reserve Bank of Australia.
    9. Urbschat, Florian, 2018. "The Good, the Bad, and the Ugly: Impact of Negative Interest Rates and QE on the Profitability and Risk-Taking of 1600 German Banks," Discussion Papers in Economics 56535, University of Munich, Department of Economics.
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    11. repec:eee:finsta:v:36:y:2018:i:c:p:12-21 is not listed on IDEAS
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    13. repec:eee:jmacro:v:59:y:2019:i:c:p:154-168 is not listed on IDEAS
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    18. Pietro Grandi, 2018. "Sovereign risk and cross-country heterogeneity in the transmission of monetary policy to bank lending in the euro area," Working Papers hal-01878602, HAL.

    More about this item

    Keywords

    bank lending; monetary transmission mechanisms; low interest rate environment;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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