Financing Imbalances and Heterogeneous Effects of Monetary Policy

This work documents the existence of a heterogeneous banking channel in Peru, where monetary policy actions have a differentiated effect on the credit market, and which depends on the level of leverage of financial institutions. First, we demonstrate that the heterogeneity of the banking channel may not be attributed to asymmetric monetary policy shocks. Using aggregate data, we find a symmetric aggregate response of the credit market to expansive or contractive monetary policy shocks. Second, we characterize the heterogeneity of the banking channel based on the financing structure of financial institutions. Using financial entity level data, we demonstrate that the external financing component of the debt structure, measured by the level of leverage, primarily determines a heterogeneous monetary policy lending channel. Meanwhile, the internal banking network for mobilizing deposits and credit plays a less significant role. To show causal effects of this financing imbalance channel, we use microdata at the branch level, together with an econometric strategy that focuses on local credit markets and a measure that considers the geographic distribution of financing imbalances. We show that the dependence on external funding at the branch level determines the heterogeneity in the credit channel, for the monetary policy transmission, with two important margins: an amplifying effect and another attenuating effect, associated with a lower or higher level of leverage, or with a greater or lesser need for external funding, respectively. To provide a theoretical underpinning for our empirical findings, we develop a formal model. In this model, we demonstrate that the financing structure of a bank generates effects that amplify or attenuate the influence of monetary policy.