Does Bank Competition Influence the Lending Channel in the Euro Area?
32 Pages Posted: 6 Jul 2013 Last revised: 6 Mar 2015
Date Written: June 25, 2013
Abstract
This paper examines how bank competition influences the bank lending channel in the Euro area countries. Using a large panel of banks from 12 euro area countries over the period 2002-2010 we analyze the reaction of loan supply to monetary policy actions depending on the degree of bank competition. We find that the effect of monetary policy on bank lending is dependent on bank competition: the transmission of monetary policy through the bank lending channel is less pronounced for banks with extensive market power. Further investigation shows that banks with less market power were more sensitive to monetary policy only before the financial crisis. These results suggest that the bank market power has a significant impact on monetary policy effectiveness. Therefore, wide variations in the level of bank market power may lead to asymmetric effects of a single monetary policy.
Keywords: bank competition, bank lending channel, monetary policy, euro area
JEL Classification: E52, G21
Suggested Citation: Suggested Citation
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