The 2007/08 crisis has highlighted how banking system losses can lead to tightening credit conditions for companies and households which in turn can impose costs on real activity. It has also shown that monetary policymakers are aware that they can use monetary policy to help offset the adverse effects of financial instability on real activity. According to the minutes of the September meeting of the Federal Open Market Committee (FOMC):
“…members judged that a lowering of the target rate was appropriate to help offset the effects of tighter credit conditions on the economic outlook. Without such policy action, members saw a risk that tightening credit conditions and an intensifying housing correction would lead to significant broader weakness in output and employment. In order to forestall some of the adverse effects on the economy that might otherwise arise all members agreed that a rate cut of 50 basis points was the most prudent course of action.”
Contents
I. Introduction
II. Theory and Hypothesis Development
III. Empirical Method and Data
IV. Benchmark Results
V. The Effect of Monetary Policy
VI. Financial Conditions: Crisis Versus Noncrisis Countries
VII. Robustness Checks
A. Bank-fixed Effects
B. Endogeneity of Bank-specific Characteristics VIII. Conclusions
Tables
1. Summary Statistics
2. Average of Provision Ratio
3. Benchmark Equation—Determinants of Loan Growth 4. The Effect of Losses and Monetary Policy—Interactions
5. The Effect of Capital and Monetary Policy—Interactions
6. The Effect of Losses, Capital, and Monetary Policy—Interactions
7. Determinants of Loan Growth: Crisis Versus Non-crisis Countries
8. Monetary Policy and Banking Crises
9. Monetary Policy and Banking Crises—Interactions
10. The Effect of Losses and Monetary Policy—Fixed Effects
11. The Effect of Losses and Monetary Policy-Robustness to Endogeneity
(Fixed Effects Estimate)
12. Description of Variables and Data Sources
13. Summary Statistics: Monetary Policy and Banking Crisis Countries
14. Summary Statistics: Monetary Policy and Banking Crisis Episodes
Appendix
References.
Download
Bank Losses, Monetary Policy, and Financial Stability—Evidence on the Interplay from Panel Data
