BANK HETEROGENEITY AND MONETARY POLICY TRANSMISSION
Sophocles N. Brissimis
Bank of Greece and University of Piraeus
Manthos D. Delis
University of Ioannina
ABSTRACT
The heterogeneity in the response of banks to a change in monetary policy is an important element in the transmission of this policy through banks. This paper examines the role of bank liquidity, capitalization and market power as internal factors influencing banks’ reaction in terms of lending and risk-taking to monetary policy impulses. The ultimate impact of a monetary policy change on bank performance is also considered. The empirical analysis, using large panel datasets for the United States and the euro area, elucidates the sources of differences in the response of banks to changes in policy interest rates by disaggregating down to the individual bank level. This is achieved by the use of a Local GMM technique that also enables us to quantify the degree of heterogeneity in the transmission mechanism. It is argued that the extensive heterogeneity in banks’ response identifies overlooked consequences of bank behavior and highlights potential monetary sources of the current financial distress.
Keywords: Monetary policy; Bank heterogeneity; Risk-taking; Bank performance
JEL classification: E44, E52, G21, C14
Acknowledgements: We are grateful to Efthymios Tsionas and Heather Gibson for helpful comments. We also thank seminar participants at the Athens University of Economics and Business, Bangor Business School and University of Maastricht for useful comments.
Correspondence:
Sophocles N. Brissimis
Bank of Greece, 21, El. Venizelou Ave.,
10250 Athens, Greece,
Tel. +30210-3202388
Fax +30210-323
e-mail:
sbrissimis@bankofgreece.gr