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Business Cycles, Monetary Policy, and Bank Lending: Identifying the bank balance sheet channel with firm-bank match-level loan data

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  • HOSONO Kaoru
  • MIYAKAWA Daisuke

Abstract

This paper examines the impact of business cycles and monetary policy on bank loan supply. To this end, we use a unique firm-bank match-level dataset covering listed firms in Japan that allows us to control for firms' time-varying unobservable loan demand and endogenous bank-firm matching, so that we can identify the effects of business cycles and monetary policy on loan supply through the bank balance sheet channel. The estimation results indicate that banks with more liquidity or capital tend to lend more to their client firms. The quantitative impact of bank liquidity and capital on loan supply was economically sizable and larger when economic growth was lower. Furthermore, the quantitative impact of bank liquidity on the growth rate of loans more than doubled when quantitative easing was terminated. Overall, these results imply that changes in economic growth and monetary policy significantly affected loan supply through the bank balance sheet channel. We also find evidence that fluctuations in economic growth and monetary policy are transmitted to capital investment through the bank balance sheet channel in the case of firms with high investment opportunities.

Suggested Citation

  • HOSONO Kaoru & MIYAKAWA Daisuke, 2014. "Business Cycles, Monetary Policy, and Bank Lending: Identifying the bank balance sheet channel with firm-bank match-level loan data," Discussion papers 14026, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:14026
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    Cited by:

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    2. Arito Ono & Kosuke Aoki & Shinichi Nishioka & Kohei Shintani & Yosuke Yasui, 2016. "Long-term interest rates and bank loan supply: Evidence from firm-bank loan-level data," Bank of Japan Working Paper Series 16-E-2, Bank of Japan.
    3. NAKASHIMA, KIYOTAKA & Ogawa, Toshiaki, 2021. "The Impacts of Strengthening Regulatory Surveillance on Bank Behavior: A Dynamic Analysis from Incomplete to Complete Enforcement of Capital Regulation in Microprudential Policy," MPRA Paper 109147, University Library of Munich, Germany.
    4. Inoue, Hitoshi & Nakashima, Kiyotaka & Takahashi, Koji, 2018. "The Emergence of A Parallel World: The Misperception Problem for Bank Balance Sheet Risk and Lending Behavior," MPRA Paper 89088, University Library of Munich, Germany.
    5. Kiyotaka Nakashima & Masahiko Shibamoto & Koji Takahashi, 2017. "Risk-Taking Channel of Unconventional Monetary Policies in Bank Lending," Discussion Paper Series DP2017-24, Research Institute for Economics & Business Administration, Kobe University, revised Apr 2019.
    6. John Thornton & Caterina Di Tommaso, 2021. "The effect of non‐performing loans on credit expansion: Do capital and profitability matter? Evidence from European banks," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4822-4839, July.
    7. Nakashima, Kiyotaka, 2016. "An econometric evaluation of bank recapitalization programs with bank- and loan-level data," Journal of Banking & Finance, Elsevier, vol. 63(C), pages 1-24.
    8. Takuji Kawamoto & Taichi Matsuda & Koji Takahashi & Yoichiro Tamanyu, 2020. "Bank Risk Taking and Financial Stability: Evidence from Japan's Loan Market," Bank of Japan Working Paper Series 20-E-1, Bank of Japan.
    9. van Holle, Frederiek, 2017. "Essays in empirical finance and monetary policy," Other publications TiSEM 30d11a4b-7bc9-4c81-ad24-5, Tilburg University, School of Economics and Management.

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