The Effect of Monetary Tightening on Local Banks

41 Pages Posted: 23 Sep 2008  

Rocco Huang

Michigan State University - Department of Finance; Wharton Financial Institutions Center

Date Written: September 2008

Abstract

This study shows that during Paul Volcker's drastic monetary tightening in the early 1980s, local banks operating in only one county reduced loan supply much more sharply than local subsidiaries of multi-county bank holding companies in similar markets, after controlling for bank (and holding company) size, liquidity, capital conditions, and, most important, local credit demand. The study allows cleaner identification by examining 18 U.S. "county-banking states" where a bank's local lending volume at the county level was observable because no one was allowed to branch across county borders. The local nature of lending allows us to approximate and control for the exogenous component of local loan demand using the prediction that counties with a higher share of manufacturing employment exhibit weaker loan demand during tightening (which is consistent with the interest rate channel and the balance-sheet channel of monetary policy transmission). The study sheds light on the working of the bank lending channel of monetary policy transmission.

Suggested Citation

Huang, Rocco, The Effect of Monetary Tightening on Local Banks (September 2008). FRB of Philadelphia Working Paper No. 08-20. Available at SSRN: https://ssrn.com/abstract=1272387 or http://dx.doi.org/10.2139/ssrn.1272387

Rocco Huang (Contact Author)

Michigan State University - Department of Finance ( email )

315 Eppley Center
East Lansing, MI 48824-1122
United States

HOME PAGE: http://www.roccohuang.com

Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

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