The Bank Lending Channel Revisited

Abstract:     
A central proposition in research on the role of banks in the transmission mechanism is that monetary policy imparts a direct impact on deposits and that deposits act as the driving force of bank lending. This paper argues that the emphasis on policy-induced changes in deposits is misplaced. A reformulation of the bank lending channel is proposed that works primarily through the impact of monetary policy on banks’ balance sheet strength and risk perception. Such a recasting implies, contrary to conventional wisdom, that greater reliance on market-based funding enhances the importance of the channel.

Keywords: monetary policy, bank lending channel, bank capital, credit, money

JEL Classification: E40, E44, E51, E52, E58

Accepted Paper Series