Evidence on the Bank Lending Channel in Ukraine

8. Conclusions The existence of the bank lending channel has important implications for the conduct of monetary policy by a central bank. The literature predicts that if the bank lending channel is present, banks should cut back on lending in response to monetary contraction and weak undercapitalized banks should show greater change in loans than well established banks. This happens because for the former it is more problematic to offset reduction in deposits with funds from other external sources. Tests for the existence of bank lending channel usually use the approach of disaggregating banks according to some measure of balance sheet strength, like capitalization or asset size and then estimating lending responses to monetary shock depending on bank strength. Our chapter uses capitalization, bank assets and liquidity as disaggregating variables. We find that for Ukrainian banks the level of bank capitalization is the best measure of balance sheet strength. Our estimation results suggest that lending response of a Ukrainian bank depends on its capitalization — the higher the capitalization the less sensitive a bank is to changes in monetary policy. This result is consistent with theoretical predictions and implies that bank lending channel has some economic power in the Ukrainian economy.