Ebook Are Asset Size and Capital Strength Matters in Influencing the Bank-Lending Channel?
There has been long determined and interest on the role of banks in the transmission of monetary policy and business cycle. For example, Keynes (1936) found that money plays an important role to economic growth. Furthermore, Gurley and Shaw (1995) began to redirect attention toward the overall interaction between financial structure and real activity, emphasizing financial intermediation, and particularly the role of financial intermediaries in the credit supply process as opposed to the money supply process.
However, Bernanke and Blinder (1988) produced another view that looked into the assets side as a monetary policy channel to influence the economic activities. For example, in a monetary contraction, banks’ reserves decrease because of reserve requirements and hence reduce the deposits. Consequently, it may increase the short-term and long-term interest rate and also reduce the supply of bank loans. If bank-dependent borrowers are dominant, thus it will reduce the investments and thereby in economic activity. This view, known as balance sheet channel, is further argued by Bernanke and Gertler (1989). They claim that monetary policy can also affect a borrower’s financial position or net worth, thereby influencing the costs of external finance to the borrower (arising from the loss of creditworthiness). Consequently, the monetary policy can affect the borrowers’ investment and spending plan.
However, the recent studies made by Altunbas, Fazylov, and Molyneux (2002) found that across the EMU systems, undercapitalized banks (of any size) tend to respond more to change in monetary policy. Furthermore, Huang (2003) analyzed the cross-section differences between bank-dependent and non-bank dependent listed companies and between listed and non-listed companies. Their results concluded that small firms bear most of the reductions in bank loan supplies, and since they do not have many alternatives to bank finance, they suffer more from monetary tightening than big firms. Furthermore, he found that big, non-bank-dependent firms can benefit more from the bank-firm relationship than small, bank-dependent firms.
The changes in the monetary policy channel give an idea to regulate and strengthen the banking industry. Thus, several questions can be highlighted: how do the changes in the monetary policy tools affect the bank lending? Do the current regulations (such as capital requirement) affect the bank portfolio behaviour? Does the effect differ for different size of banks? Thus, we hope this paper could be contributed to the policy makers for making a good policy in order to stabilize the economy condition as well as banking industry.
Therefore, the objective of this paper is to analyze bank lending channel as one of the important transmission mechanism of monetary policy. We also want to examine whether deregulation can produce a counteract affect on the bank supply of loans (assets side).
The organisation of this paper is as follows. Section 2 discusses the stlyzed facts about monetary policy in Malaysia. Section 3 gives an overview of the Malaysian banking industry. In section 4, indicates recent literature on monetary transmission and bank lending. Then, section 5 we develop our methodology. Section 6 we present our empirical results. Ultimately, section 7 concludes.
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