The Bank Lending Channel Reconsidered

62 Pages Posted: 20 Feb 2009

See all articles by Alistair Milne

Alistair Milne

Loughborough University - School of Business and Economics

Geoffrey Wood

Cass Business School

Date Written: January 22, 2009


It has been widely accepted that constraints on the wholesale funding of bank balance sheets amplify the transmission of monetary policy through what is called the 'bank lending channel'. We show that the effect of such bank balance sheet constraints on monetary transmission is in fact theoretically ambiguous, with the prior expectation, based on standard theoretical models of household and corporate portfolios, that the bank lending channel attenuates monetary policy transmission.

We examine macroeconomic data for the G8 countries and find no evidence that banking sector deposits respond negatively and more than lending to tightening of monetary policy, as the accepted view of the bank lending channel requires. The overall picture is mixed, but these data generally suggest that deposits fluctuate procyclically and somewhat less over the business cycle than bank lending, and that total bank deposits, unlike bank lending, show little direct response to changes in interest rates. This suggests it is very unlikely that the bank lending channel amplifies monetary policy. Our paper has thus corrected a misunderstanding about the role of banks in monetary policy transmission that has persisted in the literature for some two decades.

Keywords: credit channel, monetary transmission, bank financing constraints

JEL Classification: E44, E52, G32

Suggested Citation

Milne, Alistair K. L. and Wood, Geoffrey E., The Bank Lending Channel Reconsidered (January 22, 2009). Bank of Finland Research Discussion Paper No. 2/2009. Available at SSRN: or

Alistair K. L. Milne (Contact Author)

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leicestershire, LE11 3TU
United Kingdom

Geoffrey E. Wood

Cass Business School ( email )

London, EC2Y 8HB
Great Britain
+44 0 20 7040 8740 (Phone)
+44 0 20 7040 8881 (Fax)

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics