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How the credit channel works: differentiating the bank lending channel and the balance sheet channel

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  • Lamont K. Black
  • Richard J. Rosen

Abstract

The credit channel of monetary policy transmission operates through changes in lending. To examine this channel, we explore how movements in the real federal funds rate affect bank lending. Using data on individual loans from the Survey of Terms of Bank Lending, we are able to differentiate two ways the credit channel can work: by affecting overall bank lending (the bank lending channel) and by affecting the allocation of loans (the balance sheet channel). We find evidence consistent with the operation of both internal credit channels. During periods of tight monetary policy, banks adjust their stock of loans by reducing the maturity of loan originations and they reallocate their short-term loan supply from small firms to large firms. These results are stronger for large banks than for small banks.

Suggested Citation

  • Lamont K. Black & Richard J. Rosen, 2007. "How the credit channel works: differentiating the bank lending channel and the balance sheet channel," Working Paper Series WP-07-13, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-07-13
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    4. Carolina Ortega Londono & Diego Restrepo, 2018. "Transmission of Monetary Policy and Bank Heterogeneity in Colombia," Documentos de Trabajo de Valor Público 16987, Universidad EAFIT.
    5. Deimantė Teresienė & Greta Keliuotytė-Staniulėnienė & Rasa Kanapickienė, 2021. "Sustainable Economic Growth Support through Credit Transmission Channel and Financial Stability: In the Context of the COVID-19 Pandemic," Sustainability, MDPI, vol. 13(5), pages 1-34, March.
    6. Kapinos, Pavel & Kishor, N. Kundan & Ma, Jun, 2022. "Dynamic comovement among banks, systemic risk, and the macroeconomy," Journal of Banking & Finance, Elsevier, vol. 138(C).
    7. Orzechowski, Paul E., 2017. "Bank profits, loan activity, and monetary policy: evidence from the FDIC's Historical Statistics on Banking," Review of Financial Economics, Elsevier, vol. 33(C), pages 55-63.
    8. Calmès, Christian & Théoret, Raymond, 2020. "Bank fee-based shocks and the U.S. business cycle," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).

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