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

  • Adam B. Ashcraft
  • Murillo Campello

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.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 153.

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Date of creation: 2002
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Handle: RePEc:fip:fednsr:153
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  17. Mayne, Lucille S, 1980. "Bank Holding Company Characteristics and the Upstreaming of Bank Funds: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(2), pages 209-14, May.
  18. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
  19. Murillo Campello, 2002. "Internal Capital Markets in Financial Conglomerates: Evidence from Small Bank Responses to Monetary Policy," Journal of Finance, American Finance Association, vol. 57(6), pages 2773-2805, December.
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