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Balance sheet strength and the bank-lending channel: evidence from an emerging market

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  • Supriya Kapoor

    (UCD Geary Institute for Public Policy)

Abstract

The bank lending channel view of monetary policy argues that bank loan supply should fall during periods of tight monetary policy. Employing a sample of over 122 Indian commercial banks for the period between 2005-17, we investigate the role of cross-sectional heterogeneity in bank balance sheet strength in the effectiveness of bank lending channel. We show that both small and large banks with liquid balance sheets are able to maintain their supply of loans during periods of tight monetary policy. Furthermore, we find that higher capital ratios can also enable banks to maintain their loan supply, in particular among smaller financial institutions. The mechanism at play is a time deposits insulation channel, whereby banks with strong balance sheets can raise time deposits during periods of contractionary monetary policy.

Suggested Citation

  • Supriya Kapoor, 2017. "Balance sheet strength and the bank-lending channel: evidence from an emerging market," Working Papers 201709, Geary Institute, University College Dublin.
    • Handle: RePEc:ucd:wpaper:201709
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    References listed on IDEAS

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    More about this item

    Keywords

    bank lending channel; time deposits; monetary policy; liquidity;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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