Impact of Monetary Policy on Bank Lending: Does Market Structure Matter?

ABSTRACT

This study investigated the role of various factors in the bank lending channel of monetary policy transmission. Using annual data (2000–2012) from the Chinese banking industry, the result of this study suggest that bank lending channel neither operates through balance sheet characteristics nor through bank risk. However, this study provides significant evidence of the lending channel operates through the market structure. The market power undermines the effect of monetary policy on bank lending. The results have important policy implications for the Chinese banking industry. Although higher competition raises concerns about financial stability, however, in this case, higher market power has a detrimental effect on bank lending channel and monetary policy transmission. Such results may argue pro-competitive policy in the Chinese banking market so that the desired objective of monetary policy can be achieved.

KEYWORDS:

• Bank lending channel
• monetary policy transmission
• market structure
• bank risk
• monetary policy
• lending

JEL CLASSIFICATIONS:

• G21
• E52

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 See Section 3.4 data and variable construction for details on institutional characteristics (INC).

Additional information

Funding

This work was supported by National Science Foundation China for Distinguished Youth Scholars [71225002] and National Science Foundation China Grant [71520107002].

Notes on contributors

Muntazir Hussain

Muntazir Hussain earned his PhD from the University of Science & Technology of China. He is currently working as an Assistant Professor in the LBS at the University of Lahore, Sargodha Campus, Pakistan. His research interests are International Finance, Capital Markets, and Behavioral Finance. He has 16 publications in reputable international journals. He is an HEC approved PhD supervisor and also working as a reviewer in various journals of repute.

Usman Bashir

Usman Bashir received his PhD degree in Finance from the School of Management, University of Science and Technology of China. His research interests include Financial Economics, Financial Institutions & markets.