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Banks and Monetary Policy Transmission

Paper Session

Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)

Manchester Grand Hyatt, Seaport C
Hosted By: American Finance Association
  • Chair: David Thesmar, Massachusetts Institute of Technology

Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation

Yifei Wang
,
University of Michigan
Toni Whited
,
University of Michigan
Yufeng Wu
,
University of Illinois
Kairong Xiao
,
Columbia University

Abstract

We quantify the impact of bank market power on the pass-through of monetary policy to borrowers. We estimate a dynamic banking model in which monetary policy affects banks' funding costs. In the model, banks optimally choose the degree to which they pass these cost shifts to borrowers and depositors. Capital and reserve regulations also influence the degree of pass-through. We find that in the last two decades, bank market power explains a significant portion of monetary transmission. The quantitative effect is comparable in magnitude to that of the bank capital channel. In addition, market power interacts with bank capital regulation to produce a reversal of the effect of monetary policy when the Federal Funds rate is low.

Is There a Zero Lower Bound? The Effects of Negative Policy Rates on Banks and Firms

Carlo Altavilla
,
European Central Bank
Lorenzo Burlon
,
European Central Bank
Mariassunta Giannetti
,
Stockholm School of Economics
Sarah Holton
,
European Central Bank

Abstract

Exploiting confidential data from the euro area, we show that banks can pass negative rates on to their corporate depositors, without experiencing a contraction in funding, especially if they are sound. The effects of the negative interest rate policy (NIRP) become stronger as policy rates move deeper into negative territory. Banks offering negative rates provide more credit than other banks suggesting that the transmission mechanism of monetary policy is not hampered. The NIRP provides further stimulus to the economy through firms’ asset rebalancing. Firms with high current assets at banks offering negative rates appear to increase their investment in tangible and intangible assets and to decrease their cash-holdings to avoid the costs associated with negative rates. Overall, our results challenge the commonly held view that conventional monetary policy becomes ineffective when policy rates reach the zero lower bound.

Nonbanks, Banks, and Monetary Policy: United States Loan-Level Evidence Since the 1990s

David Elliott
,
Bank of England
Ralf Meisenzahl
,
Federal Reserve Board
José-Luis Peydró
,
ICREA, Pompeu Fabra University, CREI, Barcelona GSE, Imperial College London, and CEPR
Bryce Turner
,
Federal Reserve Board

Abstract

We analyze the effects of monetary policy on banks and nonbank lending to corporations and households since the 1990s. Exploiting U.S. monetary policy shocks and loan-level data, we find that after a one standard deviation contractionary monetary policy shock nonbank credit supply expands relative to bank credit supply by 12 percent in the corporate loan market and by 10 percent in the consumer loan and mortgage markets. The effects are stronger for ex-ante riskier loans. However, overall substitution in corporate loan and mortgage markets is limited due to demand factors. In the consumer credit market, the nonbank credit expansion completely offsets the retrenchment by banks. Our results show that nonbank lenders significantly attenuate the bank lending and risk-taking channels of monetary policy.
Discussant(s)
Itamar Drechsler
,
University of Pennsylvania
Florian Heider
,
European Central Bank
Greg Buchak
,
University of Chicago
JEL Classifications
  • G2 - Financial Institutions and Services