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Do highly liquid banks insulate their lending behavior?

Listed author(s):
  • Supriya Kapoor

    (UCD Geary Institute for Public Policy)

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    The role of banks in the transmission of monetary policy has been of significance lately. We aim to analyse the bank lending behaviour during changes in monetary policy. We test for loan supply shifts by segregating banks based on their liquidity along with size and capital ratio. This paper employs uninsured, non-reservable liabilities such as time deposits and investigates whether banks are able to insulate themselves during a monetary policy change. We find that the loan supply shock can be neutralized post monetary policy changes. Furthermore, the less liquid and small banks are unable to carry out such operations and are more affected by monetary shocks. This has important implication in the working of commercial banks and effects of monetary policy.

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    File URL: http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201709.pdf
    File Function: First version, 2017
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    Paper provided by Geary Institute, University College Dublin in its series Working Papers with number 201709.

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    Length: 16 pages
    Date of creation: 09 Nov 2017
    Handle: RePEc:ucd:wpaper:201709
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    1. Aleem, Abdul, 2010. "Transmission mechanism of monetary policy in India," Journal of Asian Economics, Elsevier, vol. 21(2), pages 186-197, April.
    2. Gambacorta, Leonardo, 2005. "Inside the bank lending channel," European Economic Review, Elsevier, vol. 49(7), pages 1737-1759, October.
    3. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    4. 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.
    5. 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.
    6. Kishan, Ruby P & Opiela, Timothy P, 2000. "Bank Size, Bank Capital, and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 121-141, February.
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