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A balance sheet analysis of monetary policy effects on banks

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  • Li, Boyao

Abstract

Monetary policy operations affect bank balance sheets (BBSs). This study develops a balance sheet model to examine the impacts of monetary policy operations on banks' ability to supply funds. That ability is assessed using the balance sheet capacities provided by regulatory risk management instruments. The balance sheet approach views a monetary policy operation as a transaction between the central bank and a commercial bank, modeling the transaction as multiple changes to the BBS. This study identifies and distinguishes the effects of multiple changes in the BBS on balance sheet capacity. A balance sheet change resulting from a monetary policy operation may positively or negatively affect balance sheet capacity. Thus, a monetary policy may have a positive and a negative effect simultaneously. Positive (negative) effects result from balance sheet changes that reduce (increase) bank risks, as measured by regulations. As regulatory stringency decreases, the positive effects increase, whereas the negative effects remain unchanged. A BBS capacity channel of monetary policy is also shown.

Suggested Citation

  • Li, Boyao, 2024. "A balance sheet analysis of monetary policy effects on banks," Global Finance Journal, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:glofin:v:61:y:2024:i:c:s1044028324000450
    DOI: 10.1016/j.gfj.2024.100973
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    More about this item

    Keywords

    Balance sheet; Banking; Monetary policy; Monetary transmission; Regulation;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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