Bank-characteristics, lending channel and monetary policy in emerging markets: bank-level evidence from Malaysia

Abstract

This article analyses the effects of bank-specific characteristics, bank specialization and portfolio concentrations on the transmission of monetary policy via the bank-lending channel in Malaysia, a fairly well-developed financial system, using the dynamic panel regression estimation. The results provide evidence in favour of the bank-lending channel theory that the bank-lending channel operating via small- and low-liquidity banking entities. Furthermore, the evidence suggests that the dividing lines between different categories of financial institutions distinguished by differences in both market and regulatory structures, influence the way the financial institutions react to a monetary policy shock, of which finance companies react stronger than commercial banks. The results also suggest that banks with a higher level of corporate loan concentration experience greater financial constraint and limited access to other source finance.

Keywords:

• banking lending
• credit channels
• monetary policy
• Malaysia

JEL Classification::

• E44
• E52

Acknowledgements

The views expressed in this article are those of the author and do not necessarily represent those of the institution. The author is grateful for the comments provided by referees and the editor of this journal. He also wishes to acknowledge inspiring discussions with Paul Mizen, Alessandra Guariglia and Spiros Bougheas.

Notes

¹ Many of these studies were conducted as part of European Central Bank's (ECB) research network and published in Angelini et al. (2003).

² This number of observation after the removal of extreme observations is defined as the top and bottom of one percentile distributions of the main variables such as lending and deposit. In addition, financial institutions with less than eight consecutive observations (less than 2 years observations) for each financial institution will be excluded from the sample to allow the first differencing process and the construction of the instruments.

³ Prior to 2004, the base lending rate of the financial institutions is based on the 3-month interbank rate followed by the 3-month intervention rate of Bank Negara Malaysia. In April 2004, the current policy rate in Malaysia is based on the overnight policy rate replacing the intervention rate under the new interest rate framework.

⁴ See Section IV on the descriptive analysis of corporate and banking sector in Malaysia for more details.

⁵ The Sargan/Hansen tests indicate that the instruments are valid although there might be some ‘over-fitting’, which is not a real problem.