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    Does The Financial Structure Ofbanks Influence The Bank Lendingchannel of Monetary Policy - Evidence From Colombia PDF

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    ‘The cme issue and ful text archive his ura is availabe on meal Insight at: -ttpsuheww emerald. comsinsight/1746-8809.htm Does the financial structure of tual banks influence the bank lending banks channel of monetary policy? Evidence from Colombia Jose Eduardo Gomez-Gonzalez sie gat scuela Internacional de Ciencias Econdmicas y Administatias, ‘ove hey Universidad de La Sabane, Chia, Colombia Shaat ‘Ai Kuten Ace Ae Department of Economics and Finance, Southern linois Universily Edwardsville, Edwardsvil, Minois, USA Jair N. Ojeda-Joya Department of Research, Banco de la Republica de Colombia, Bogota, Colombia, and Camila Ortiz Department of Economics, Universidad de los Andes, Bogota, Colombia Abstract Purpose - This paper tet the impact ofthe financial srt of banks on the bank ending chanel of ‘monetary poly wananissin Clana, Design/methodology/approach ~ We use « monthly panel of SL commercial bans forthe period iseeeanles Findings ~ An intease inthe monetary poliy interest rate significa yeduces bank loan growth. The sagt thisetet depends on banks franca stature Aaditsonaly, entity an aspen elec Invhih the ban ending Cannel ssvanger in monet ci expans.one Weshov that this behavior is due to the heterogeneous response of banks with in Inport implrations forthe design i rpleentatin ‘banks poey wi key economic agent. Practical implications ~ The fat thatthe BLC is stonge in tes of monetary amtacton is quite ronetaty poly tanemssion is harder Gunng macroecne me ‘ovens: When investment plan are depressed, monetary stim may prove insficent to reaeale ‘cede demand Ths har proven tobe tr m advanced economies afer a stong recession ‘suggest thats als tren emeging market economies or econ downturn ke shave to provide stronger shocks to reactivate private creat when the economy is reser ‘Originality/value ~Our findings pont ot tht an increase nthe monetary secre ane oan growth However eof ti elec crtcally depends cn two aspects Pt, ba Ieteropenesty matters Paticusly, the loch supply of beter captained banks i les senate to monetary poly shock. Second the respons of ceitsuply to shits short-term intrest rales rtcally depends the monetary poly stance The BLC s stronger h tines of monetary entrain Gan ding expansion. ‘Moreover, we show that the async behavin fdas othe etrogenes espone of bane wah dierent Tevlt of slvencs tothe monetary ply stance ‘Keywords Monetary poy transmission, Bink lending channel, Bank Snare strute, Solvency Heserogencouselets,Colanbia Paper type Resear paper nteretrate significantly ‘JEL Classification — E5, B52, E58, G21 Menta ‘The authors want to thank the Eaitr of the journal and thre anonymous referes ior providing Hort holshnghnge comments which Were very useful fr improving the document. bertoooneesiat TJOEM 1, Introduction ‘The recent great financial crisis (GFC) has challenged the traditional views on how central banks affect the real economy through monetary policy instruments. While most macroeconomic models that include monetary policy assume central banks have the ability of affecting credit and interest rates directly, studies of the zero lower bound have shown that monetary policy may be ineffective in boosting the demand for credit and the ‘transmission of short-term to longer-term interest rates. Similany, credit booms and the development of asset price bubbles exemplify why, under certain citcumstances, central bank effectiveness in constraining credit creation through the implementation of tight sometary policies may be extremely limited. centifying the eft of monetary policy onbanks exe supply andon the macroeconamy iso crucial importance for central banks, For ffctive decison making, central bank board members require knowing the impact of policy rates on banks’ deposit and loan rates, the lengths of transmission and its duration, There is extensive research in the literature about the most appropriate metho testing and measuring the effect of monetary policy on bank lending supply. ‘While the recent debate inthe United States and European economies has been about the effect of the GFC and the implied unconventional monetary policy onthe BLC (Heryan and ‘Treremes, 2017), the measurement of this channel in developing economies needs further exploration. First, emerging market economies have less-developed capital markets and, therefore, firms in these economies are more bank dependent. This fact implies tha, ia BLC exists, it is sensible to assume that is magnitude is stronger in these economies (Rvbczinsi, 1997), Second, monetary policy in emerging ecomomis, especially in small and open ones, varies more than in developed economies. Most small open economies in emerging countries are important commodity producers. Fluctuations in the prices of commodities generate monetary and exchange rate policy responses from monetary authorities causing frequent monetary supply shocks, Therefore, the BLC fitexists) can be more easily identified im these countries, Third, bank heterogeneity i larger in emerging market economies. i countries like Colombia, large international banks coexist with small credit cooperatives. This impiies that the impact of monetary policy shocks in these countries largely depends on the composition of banks in the banking industry and their balance sheet characteristics I this paper we study the BLC in an emerging econonay where the effect ofthe GFC was limited and no systematic unconventional monetary policies have been implemented. In addition, we study differential intensities of the BLC for alternative monetary policy tances, explicitly considering bank balance sheet heterogencty. Our study conteibutes to this literature providing a better understanding of the BLC in emerging economies with similar monetary policy frameworks. Specifically, up to our knowledge this paper isthe first in studying the interaction between the monetary policy stance, measured by the Taylor rule sap, and individual bank balance sheet characteristics on the intensity of transmission of central bank poicy rates through the BLC, We use the Taylor rule gap instead of alternative measures of the monetary policy stance, a8 recent papers have shown that this gap has important real effects on the economy andi the main predictor of credit and housing bubble formation and duration (se, for instance, Cecchetti al, 2017; Amador-Torres ea, 2018) Additionally, the Taylor rule gapis a more adequate measure of monetary policy shocks than. alternative measuxes, as it measures the difference between the observed policy interest rate and the one that should have been inplemented ifthe central bank should have followed a simple Taylor rue. Hence, if commercial banks use a Taylor rule to predict future interbank. interest rates, this gap is a measure of monetary poliey innovations (or surprise). ‘Two conditions are required for the existence of a bank lending channel (BLO): 1) Incomplete and imperfect credit markets and 2) imperfect substitutability between banking cit and other sources of external funding for some firms and households, If these two conditions hold, the central bank. can affect the supply of bank loans. Under this channel, contractive policies, sch as increases in the short-term interest rate, may have an impact on bank lending ifthe resulting reduction on demand deposits cannat be completely offset by issuing non-teservable abilities (Bernanke and Blinder, 1992). ‘Models ofthe BLC predict that bank- specific characteristics are important in determining ‘theresponse of loan supply after the occurrence of monetary policy shocks. Empirical studies Ihave identified three most relevant bank characteristics: size, capitalization and liquidity (Kishan and Opicla, 2006). Using different combinations of these characteristics, several papers have encountered the operation af a BLC in different countries [1] Available empirical ‘evidence provides substantial support forthe view that bank-dependent borrowers are more adversely impacted by a tightening of monetary policy than borrowers with access to financial markets (Pungacova etal, 2014). Additionally, the evidence aso points out that a BLCcan be especially important in countries where banks and firms have imperfect access to financial markets such as Colombia. Liquidity matters, as banks holding more liquid assets have a higher chance to maintain their lending schedules when monetary policy tightens by selling these liquids assets in secondary markets. For instance, banks holding govemment bonds are in general less affected by monetary policy contractions than banks with ess liquid assets in their portfolios {see, for instance, Gomez-Gonzalez and Gros, 2007). ‘The size of banks can also matter, as larger banks usually have higher access to capital markets, especially in emerging market economies. Therefore, they can find substitutes to phinary Iquidity easier than smaller banks. Inthis paper, we study the BLC of monetary policy in Colombia, a middle-income emerging ‘cconomy sharing similar features with other Latin American economies such as Mexico, Brazil, Peru, Uruguay and Chile. These features include the adoption ofan inglation targeting regime in the early 2000s, being a commodity exporter and being a bank-based economy ‘wheremore than 50% of non-financial firms’ external funds are provided by banks (Figure I). (pacentagessot 00 Gor Source(s): Banco de Ie Republica, Financial Stability Report, 2017 Financial structure of banks Figure 1, Nontaes corporate bt 9 insinent-Colombin TJOEM In addition, the non-financial corporate sector in Colombia has become more dependent on domestic bank credit in the last 15 years, suggesting that the bank lending channel may have become stronger in Colombia inthis period. Most banks inthe country ate domestic and have limited access to international funding dve to prevailing regulations and their scarce participation in foreign capital markets, Therefore, they basically fund through domestic deposit issuance. This fact implies that a shortage of core deposits is hard to replace by issuing other types of claims. Hence, Colombian banks tend to be mote sensitive to monetary policy shocks than similar banks in other mote financially open emerging economies (eg. Chile, Mexico, Peru). ‘The BLC in Colombia has been insulficiently explored inthe literature. Specifically, there are only two studies using bank-level data for this country. Gomez-Gonzalez and Grosz (2007) and Reyes ef al (2015) have verified the presence of a BLC of monetary policy transmission using the financial structure of banks as the identification strategy. We contribute to this literature in three ways, First, we test for possible asymmetric effets in the presence of different monetary policy stances, Second, we test whether the magnitude of the BLC in Colombia varies depencing on the financial structure of individual banks and its interactions vith the monetary policy stance. Third, we consider an important development after 2011 that was not included in previous studies using Colombian data, It consists of a period when ‘monetary policy was expansionary both in Colombia and in the major developed economies, international iquidity was abundant, and the country received large capital inflows. Thus, credit grew rapidly (Amador-Torres ef al, 2016) as well as asset prices, especially in the housing sector (Gomez-Gonzalez¢ al, 2016) The inclusion ofthis period of rapid loan growth fs useful to better compare the operation of the BLC during periods of contractive and expansionary monetary policy However, as we mentioned above, this study goes beyond the simple exploration of the BLC in Colombia, We develop a more precise measure of the monetary policy stance {the Taylor rale gap) than those used by other papers inthe literature, and we show that the intensity of the BLC varies depending on the interaction ofthis variable with bank balance sheet characteristics. Our results therefore provide further evidence on the bank lending channel and its cyclical variation which are useful for central banks in emerging market economies in general, To study the above issues, we use a rich dataset comprised of monthly balance sheet information for over 16 years of all Colombian commercial banks (51 in total) and explore the effect of different sources of heterogeneity (financial, macroeconomic and policy) on the existence and strength ofthe BLC. We focus in the period comprised between April 1996 and August 2014. Our findings point out that an increase in the monetary policy interest rate significantly reduces bank loan growth. However, the magnitude of this effect critically depends on two aspects. First, bank heterogeneity matters. Particularly, the loan supply of Detter capitalized banks is less sensitive to monetary policy shocks. Second, the response of credit supply to shifts in short-term interest rates critically depends on the monetary policy stance, The BLC is stronger in times of monetary contraction than during expansions. ‘Moreover, we show that this asymmetric behavior is due to the heterogeneous response of ‘banks with different levels of solvency to the monetary policy stance. ‘The fact that the BLCis stronger in times of monetary contraction is quite interesting for central banking, as it shows that monetary policy transmission is harder during macroeconomic downturns. When investment plans are depressed, monetary stimulus ‘may prove insufficient to reactivate credit demand. This has proven to be true in advanced fconomies after a strong recession and our results suggest that is also true in emerging market economies for economic downturns in general. Central banks may have to provide stronger shocks to reactivate private credit when the economy is facing a slow economic recovery. ‘The importance of bank capital in monetary policy transmission shows that central banks ‘must consider bank solvency (and, more generally, banks’ financial conditions) when raking ‘monetary policy decisions, This is an issue that has been largely ignored by central banks, especially in emerging market economies. Froma policy point of view, our results imply that ‘models af monetary policy transmission must consider financial variables to generate precise estimates ofthe required policy shock to achieve their goals. Specifically, they must include the level of bank capital buffers and ther interaction with monetary policy shocks because, as shown by Van den Heuvel 2012), banks make their prtfolio decisions based upon the level af ‘these buliers ‘The rest of the paper is organized as follows. Inthe next section, a literature review is presented, The third section discusses the methodology used. The fourth section presents the ‘empirical results, while the final section concludes the paper with some policy recommendations. 2. Literature review “Although there isa vast research literature on the bank lending channel, most ofthe studies focus on developed countries. Fewer analyses have been conducted on developing economies. ‘The results of studies of developed countries are rather mixed and inconclusive. In general, they suggest that this channel is more effective in some countries and less effective in others. In other words, there isa lot of country heterogeneity. Ths fact suggests that further exploration ‘of specific countries is required. However, most papers conclude that banks with weak balance sheets are more adversely affected by monetary policies restrictions because they have Stronger constraints for obtaining alternative sources of financing when they experience a ‘shortage in core deposits. In general, smal les liquid, porly capitalized and high creditsisk ‘banks experience a greater decrease in lending alter a restrictive monetary policy. ‘More conclusive results have been obtained for emerging market economies, Most studies find evidence ofits existence. In these countries, deposits are he main source of bank funding ‘and banks are the primary financial intermediary (Freedman and Click, 2006) Most firms are limited to bank funding as the almost unique source of external financing (Archer, 2006; ‘DeMello and Pisu, 2010; How and Wang, 2013}. ‘Mast studies ofthe bank lending channel in emerging market economies have explored the effect of bank balance sheet heterogeneity, while some of them have studies the differential effect of monetary policy transmission during policy expansions and contractions. A limited subset of studies has explored the interaction between bank characteristics and the monetary policy stance. However, up to our knowledge none of the ‘existing studies has used the Taylor rue gap as the proxy for the monetary policy stance. In this paper we use this proxy, as we consider it better than alternative meastres. On the one Irand, interbank increases or decreases do not realy show if monetary policy is being contractionary or expansionary. The true stance of monetary policy and the magnitude of policy interest rate shocks depend on the difference between the observed interest rate and ‘the one that should have been implemented by a prudent central bank. On the other hand, as ‘mentioned in the Introduction recent papers have shown thatthe Taylor rue gap i the best predictor of the development of credit and asset price booms in most economies. In therest of this section we present brief overview of the main results obtained by papers on the BLC tradition, emphasizing on those studying emerging market economies. ‘The study of the BLC first appeared in the literature at the beginning of the 1990s. Early papers focused on studying the whole financial system without providing a disaggregated analysis, Bemanke and Blinder (1992), the seminal paper in this literature, show that contractive monetary policies in the United States between 1961 and 1989 resulted in a reduction in the total supply of credit in the country. Other early papers obtained similar results (Bernanke and Gertler, 1995), However, given the aggregate nature of these studies, Financial structure of banks TJOEM their results offered a rather weak and general evidence ofthe BLC, Particularly, all these studies were subject to the critique that using aggregate data it may be impossible to separately identify supply and demand responses to monetary policy shocks, ‘Al the beginning ofthe 2000s interest inthe topic grew and a numberof studies that used bank heterogencty as an identification strategy appeared. Kishan and Opicla (2000) evaluated the existence of a BLC in the United States using a panel of 13042 commercial bbanks with data for the 1980-1996 period. They ound strong evidence of the BLC with a dlferental effect on banks depending on their size and capitalization. In paticalar, they noted that lower funding capacity due to financial restrictions imposed by a contractive policy causes smaller banks to reduce loans. Similar approaches have heen employed in recent empitical studies. For example, Xiong, (2013) finds evidence of a BLL in China during the period 2000-2011, exhibiting asymmetric effects based on the financial structure of individual banks, Smaller banks or banks with lower levels of capitalization have a stronger reaction to contractive monetary policies, On the other hand, larger banks or banks with more capitalization are more responsive wien the policy is expansionary. Similarly, Kishan and Opiela (2006) show that expansionary monetary policies fail to encourage banks with lower capitalization, as opposed tothe case of contractive policies whose effect is much more evident in small ané poor capitalized banks. More recentiy, Wang (2016) studies the effect of unconventional monetary policies on bank lending across heterogeneous financial structures in Japan and the United States. Inthe studies described before, eposits are the main catalysts behind the operation of this, mechanism. However, an alternative strand of this literature has taken a new direction Disyatat 2017) argues that monetary policy is transmuted to the market through changes in the required rate of return (2|(RRR), rather than through the amount of deposits. Thus, when faced with cantractive monetary policies, banks have a restriction on the side of capital ‘Those with a lower capital level sulfer from a decline in financial ealth, which discourages investment, prevents banks from maintaining the level of credit, and thus reduces the supply cof loans, This argument is consistent with the results in Gambacorta and Marques Ibanez (2011) wo showa deepening oftheole of banks’ capita asa buffer (or catalyst ifthe policy's expansionary) during the recent financial crises Other recent literature has studied the BLC and its interaction with other features of the financial sector. or example using data for several emerging markets, Olvero eal (201, 6) find that financial sectors with lower competition levels or higher number of consolidation Drocesses are less responsive to monetary policy shocks via the BLC. Sinular results are encountered in Ghossoub and Reed (2015) who study the optimal size distribution of the ‘banking sector as wells the effet of banking concentration on monetary policy transmission. Avyar el (2016) analyze the interaction of monetary and bank capital requirement policies for the determination of credit supply in the UK. Ther findings imply that while Farge banks react nly to the capital requirement, small banks’ credit supply reacts to both polices. Orlowski (2015) study shows the role ofthe quantitative easing program in the United States forthe diminished BLC of monetary policy after the GFC. ‘The BLC has also been studied in relation to other monetary transmission channels, For example, Aysun and Hepp (2013) and Igan ef at (2017) analyze the interaction between the balance sheet and bank lending channels with detailed US data, Similarly, Aysun (2016) uses panel data for US banks and borrowers and shows that most macroeconomic shocks are transmitted through large banks’ lending and borrowers’ balance sheets. In addition, Altunbas eal (2014) report the presence of a second sub-transmission mechanism related to the BLC, known asthe risktaking channel. These authors find that expansionary monetary policies generate a decrease in risk aversion as a result of lower requirements stipulated for offering loans, These riskier positions lead to stronger declines in loans during a monetary policy tightening (Kishan and Opieia, 2012), Ramos-Tallaa (2015) study shows the BLC and its relation with bank financial indicators in Brazil is results imply thatthe external finance premium and bank size are key characteristics that determine the strength of the BL, In addition, this channel is stronger for banks whose security portfolio includes public bonds ‘with higher market risk, Using firm-level loan data for the syndicated loan market, XwwandLa (2077) test the international bank lending channel in Asia through changes in the United ‘States dolla-denominated loans extended to Asian borrowers. Their findings support the presence of an international bank lending channel in Asia and indicate the importance af ‘credit flows in financial spillovers. ‘The most recent contributions to ths literature bring about new debates and questions for future exploration in emerging economies. Heryan and Tzeremes (2017) show that shocks to the quantity of money (M2) heiped to strengthen the BLC in Furopean economies right after the GFC. Salachas eal (2017) show that unconventional monetary policies through central Danks asset purchases have also been useful to increase bank lending, Gambacorta and Shin (2018) find that banks with good capitalization indicators allow a greater transmission of ‘monetary policy without reducing financial stability, Morais eal (2019) show that there is @ significant international BLC in which United States and European monetary policy ‘transmitted to domestic lending through local subsidiaries of foreign banks. Finally, Abuka etal 2019) use credit register (oan applications) microdata to study the BLC ina developing ‘economy by examining in detail the transmission effects on loan prices and quantities. 3. Data and methodology For the empirical analysis we use panel data with monthly records during the period 1996:1— 20148, We use data of the 51 banks participating in the Colombian financial market in this ‘period, This information comes from the Financial Superintendence of Colombia In this study we use the Colombian interbank rate (IR) as a proxy of the intervention interest rate (REPO). These two interest rates are highly correlated (90.1% between 1995:4 ‘and 20148), but the IR shows of more frequent variations (Figure 2. For the selection of periods of contractive and expansionary monetary policy we constru ‘a counterfactual analysis by simulating a Taylor rule and comparing the observed IR with the resulting interest rate that would have prevailed if the Taylor Rule had been followed. ‘Equation (1) shows our specification according to Taylor (1999): 11.5(H— a") +0563") ao where stands forthe nominal interest rate prescribed by the rule," is the natural (nominal) interest rate, «, a” is the inflation gap, andy, —y" represents the output gap. The Hodrick— Prescott filter is used to estimate potential otput,»°, Figure 5 depicts the prescribed interest tale and compares it with the actually observed IR For evaluating the potentially different strength of the bank lending channel during times ‘of monetary policy expansion and contraction, we use information provided by the hebavior of these two interest rates (the one prescribed by the rule and IR), Notice that while the prescribed interest rate ies above the IR for almost allof the sample period, bthrates tend to ‘co-move closely. Particularly, during some time periods both of them increase, while daring other periods both of them decrease, We use this fact to identify periods of monetary policy expansion and contraction. Periods of monetary policy contraction (expansion) are characterized by moments in which both interest rates increase (decrease). Based on strategy, we select two diferent moments of time in which the monetary policy stance can be clearly identified as either expansionary (2008.82008-12) or contractive (2006 10-2008). ‘The empirical methodology follows the model formulated by Kishan ef al 2000, p. 31— 132) and related studies. Concretely, we estimate the following equation by Feasible Generalized Least Squares (FGLS} Financial structure of banks TJOEM Figure2 Histercal Evotton of {he IR vs REPO Correation Coeticlent: a0 30.1% gs" 3k of Colombia Source(s): Own calculation based on the Cen wow wow IR i ctaytor Rute e é 8 Financial structure of banks Figure Tayla Rule vs Obeervee Money Poly TJOEM Sua + Venhihne +m @ ‘wheres, corresponds tothe eal growth rate of loans of bank inmonth isthe interbank interest ate at time f~ 7X, is a matvix of macroeconomic variables at tine f~} including the rel exchange rate and real GDP growth; 2, isan atray of bank specific variables (size and solvency) at time ¢— jo represents the Hadamard product [, is a matrix of ones of size 2% 1(,e-arow of anes) and -corvesponds to theresidal af the mode, for which we assume ' AR() structure which is specific foreach bank, We include controls for the real exchange rate because Colombia is a small and open economy. ‘The observed growth rate of loans results from the equilibrium between supply and demand for loans. In order to test for a bank lending chanel, identifying changes in the supply of loans is cracal. Following a simaltaneous equations approach, it sufices to havea ‘variable inthe supply equation that does not matter fr the demand equation and vice versa, ‘The loan growth supply equation in tis paper includes Variables that are proper of supply and do not directly fluence the demand for ans, such as capitalization and hank size. ‘The effect of policy interest rate changes on the supply of loans can therefore be identified by estimating Equation (2). Hence, this equation allows testing for the existence of a bank lending chante The interactions between the policy interest rate and financial bank-specfic variables permit understanding the role of the financial structure of banks on the bank. lending chan! of monetary policy ‘Werdo not use a dynamic stricture in our panel due to oth theoretical and empiical seasons, Froma theoretical point of view, there is no reason to justify that the current govt rate af loans depends on its past realizations. From an empiical perspective, our panel consists of a large number of periods and a relatively small number of banks, Concretely, ‘under the general specification the number of periods is larger than the numberof banks Tis, ‘well known that inthis case traitional panel data techniques ae not stable for estimation ‘purposes as ceffcints are not consistently estimated, In this cas, is common practice to follow a FGLS estimation (Beck, 2006). ‘We perform different panel unit-oot tests and verify all variables are covariance stationary. Concretely, we apply the test developed by Im ef al. (2003), which accounts for hnterogencous panels. 4, Empirical results 41 Results for alternative financial structure indicators Following Kishan and Opieia 2000), we test for the effect of changes inthe interbank interest rate, highly correlated with the monetary policy rate, on total credit growth with bank-level information and with bank specific as well as macroeconamic controls. This econometric strategy is devised to detect creit supply shifts as responses to monetary policy innovations sgiven the general conditions of the model presented by Kishan and Opiela 2000) ‘Table I summarizes the main features of banks in Colombia or alternative periods and for high and low levels of solvency. Bank solvency in Colombia shows disparity during the period of study. While in April 1996 this ratio is of 16% on average, by the end of the 1990s it sharply diminishes due to the major financial crisis in 1999. By the beginning of 2002 this ratios slightly above the minimum regulatory level (9% on average), and in the early 2000s it increases while the financial system recovers from the crisis. In August 2007 the average solvency ratio is 11.1%, and it rises until reaching 17% in August 2014 Apt 16 August 2007 August 2014 Solvency —Solency Solvency Solvenry Solvency Sulveney shove below above’ below” above, bel average average average average tere everage nn “05ST Market Paricpation 0 ‘Ase 298 288 70 461 2 ities 28 aa 586 478 26 “Tal Loans 288 300 Tm 438 2s Gre Charactenstes 9, ‘Teal Laan! sas waT Zw TMT Asses Commer Cn ee ee ee Loans Total Crane Consens Lows! = 31.11 ns ona neat 29 “Tal Liane nancial Indicators (0 Cepia 90 50 20 31 180 a5 Solvency 20 109 35 & 0 129 Lega 830 eo Bi sz za 509 AverageSalveney 160 m1 co “Total Manet asso 1s0ssr32 43543000 Assets milion) ‘Total Market 2408898 1ss,0649 356000 Lise alos) ‘Total Market 850 23127000 Las (§ millions) Total Market mnas208 15045800 Commercial Loans Sralions) “Total Market 520188 rsai3a0 7528610 Note(s) Solvency s measured by therato of ology of the bank total assescapitalintio is messed ‘by the aio of socal capital of the bank to total assets, Liguuty is the sum of Cash, Accounts Reesable DATS, COTS, Repos and interbank ans ‘Source(a: Own calealtins based on the Financial Sperntendence of Coomsia Financial structure of banks Table 1 Descriptivestatistice ‘he sample of banksy roupe according to Teves of alec Similarly to other emerging market economies (u and La, 2017), the size ofthe Colombian ‘nancial system increases considerably during the period of study, both in terms of assets ‘and liabilities. This expansion leads to higher bank concentration as shown byGarcia-Suaza ‘and Gomez.Gonzaler (2010), Importantly, solvent institutions have gained participation in ‘terms of the shate of loans in total assets ‘Table 2 shows an estimation of the BLC using the full sample. These results confirm the existence of a BLC in the Colombian economy, as for both total and commercial loans the short-term interest rate hasa negative impact on growth. However, tocalculate the total effect ‘of an increase in the policy rate on credit growth it is necessary to consider the interactions TJOEM Total dit, Comal crit (# Obseevations 5055) (Obeereions 5.037) Coxe ‘Sigiicance Sigiicance Constant 0216 oe 0255 ~ (cos) ote) Size 7 ns soa as, (cuss 567) — siverey ‘0901 DBL oa (o169 0199 Contr varias ™ 0m ns ne woos RERI ‘ours ns ne 0059) Longerm carabes Et ous a ” 0008) 071 ns ne (0069) ‘se a ” (oo2 respectively ‘TH interbank rate ‘Table 2 IPL ks Prokction Index Prony of GDP) Resale of the general RERL Real Exchange Rate Indes rice 109620148) Size Bank assets aba proportion of th entency Salveny: uit asa proparion of assets tal marke aeete ‘with specific bank variables. Notice that the marginal effect of a change in the policy rate on dit growth is given by: & cra Bu + Barssy*S0WWeDCY + Biene*Size eo Since the coefficient ofthe interaction with size is non-significant, the effect for total credits = (045) + (0.38)*Solvency. Using an average solvency rate of 17% (Table 1), the total effect of 100 bp increase of the policy interestyate is a 38 bp reduction total credit growth. Results for commercial credit ‘growth are very similar. One teason fr which size does not matter hereis that solvency is the key variable explaining the possibility that hanks have for extending credit when a negative monetary policy shock occurs. A well-capitalized bank can reduce its capital buffer to accommodate the reduction in deposits and continue supplying credit. Solvency is not highly correlated with size since capitalized banks have diferent sizes, Hence size does not matter in the bank lending channel. This result goes in ine with those in Kishan and Opiel (2000), ‘Note that for reasonable levels of bank solvency the marginal effect will always be negative. In other words, increases in the policy interest rate will lead to reductions in loan supply. However, the impact will be lower in better capitalized banks which can replace the reduction in loanable funds easier. Two complementary mechanisms may interact. First, better capitalized banks have higher buffers that can be used as substitutes to falling core eposits. Second, better capitalized banks have better chances of obtaining large time eposits in times of need, as they appear more solvent than otler banks to institutional investors For robustness purposes, we perform the same estimation reported above but using the inverse leverage ratio instead ofthe capitalization ratio [3] Results are qualitatively similar than those reported above, since Table 3 shows that a BLC exists and bank heterogeneity ‘matters. The only important difference with Table 2is that size and its interaction with the policy rate are statistically significant. In this case, the effect of a 100 bp increase in the ‘monetary policy rate implies a 40 bp reduction of total credit growth and 37 bp decrease in ‘commercial credit growth. These computations assume an average 4 and 10% of average Dank size and capitalization, respectively (4 ‘Summing-up, our results support the main predictions of the bank lending channel hypothesis. These results go in line with those ofthe main papers in the Herature, such as Kishan and Opiela (2000, 2006), Xiong 2013), Fungacova et al. (2014), among others. Furthermore, they expand those of previous studies focusing on Colombia, such as Gomer Gonzalez and Grosz 2007), and Reyes eal (2015). Specifically, we show thatthe intensity of ‘the bank lending channel depends on the monetary policy stance. This asymmetric behavior ‘adds to the literature and suggests central banks should expect different interest rate clasticities during monetary expansions and contractions. Additionally, these elasticities also ‘vary depending on the financial structure of banks. “Total crit, anne Observations (Observations Coctient ‘Signicance Constant 0195 = fous Size 08% “ ne aio) Capitation 14 - ” 200) Control aries 1 0080 ns ns (oor ERI “ooet ne ne 086) ors) Longserm variables ee os ” ue ” wos) wasp THB x Sie 0531 ™ 41 ” (0009) 086) 1B x O78 o 708 ” Capitalization easy) wou [Note(s Standand eur i pazenthese ali) 4, “and imply significance at Sand 10% respectively s.-Newsigniicant THe imebanterte TPE Industral Prediction Index Proxy of GDP) ERI Real Exchange Rate Index Sie: Banc assets a 2 properton of the total market essets (Ceputalaaton: Socal capital as a propartion of assets Financial structure of banks Table, Resale ofthe general model (1966-20148 inverse leverage ti TJOEM Table 4. Resale fom slated simple perids= Soveney 4.2 Result for alternative monetary policy stances ‘The rocent Subprime Financial Crisis has shown that monetary policy stimulus is of limited scope wien pessimism rales in financial markets, Specifically, conventional monetary policy has shown to be less effective in developed economies near the zeroower bound. This fact motivates further exploring the existence of potential asymmetric effects of monetary policy

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