BIS Working Papers No 297 The bank lending channel revisited doc

BIS Working Papers

No 297

The bank lending channel

revisited

By Piti Disyatat

Monetary and Economic Department

February 2010

JEL Classification: E40, E44, E51, E52, E58.

Keywords: Monetary Policy, Bank Lending Channel, Bank Capital,

Credit, Money.

BIS Working Papers are written by members of the Monetary and Economic Department of

the Bank for International Settlements, and from time to time by other economists, and are

published by the Bank. The papers are on subjects of topical interest and are technical in

character. The views expressed in them are those of their authors and not necessarily the

views of the BIS.

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© Bank for International Settlements 2010. All rights reserved. Brief excerpts may be

reproduced or translated provided the source is stated.

ISSN 1020-0959 (print)

ISBN 1682-7678 (online)

The Bank Lending Channel Revisited∗

Piti Disyatat

Bank for International Settlements

Abstract

A central proposition in research on the role that banks play in the transmission mecha￾nism is that monetary policy imparts a direct impact on deposits and that deposits, insofar

as they constitute the supply of loanable funds, act as the driving force of bank lending.

This paper argues that the emphasis on policy-induced changes in deposits is misplaced.

A reformulation of the bank lending channel is proposed that works primarily through the

impact of monetary policy on banks’ balance sheet strength and risk perception. Such a

recasting implies, contrary to conventional wisdom, that greater reliance on market-based

funding enhances the importance of the channel. The framework also shows how banks, de￾pending on the strength of their balance sheets, could act either as absorbers or amplifiers

of shocks originiating in the financial system.

JEL Classification: E40, E44, E51, E52, E58.

Keywords: Monetary Policy, Bank Lending Channel, Bank Capital, Credit, Money.

∗I would like to thank Claudio Borio, Leonardo Gambacorta, Goetz von Peter, and Nikola Tarashev for

comments and helpful discussions. The paper also benefited from comments by seminar participants at the BIS.

All remaining errors are mine. The views expressed in this paper are those of the author and do not necessarily

represent those of the Bank for International Settlements. Correspondence: [email protected]

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