Monetary Policy and Bank Lending in a Low Interest Rate Environment: Diminishing Effectiveness?

33 Pages Posted: 28 Feb 2017

See all articles by Claudio E. V. Borio

Claudio E. V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Date Written: February 2017

Abstract

This paper analyses the effectiveness of monetary policy on bank lending in a low interest rate environment. Based on a sample of 108 large international banks, our empirical analysis suggests that reductions in short-term interest rates are less effective in stimulating bank lending growth when rates reach a very low level. This result holds after controlling for business and financial cycle conditions and different bank-specific characteristics such as liquidity, capitalisation, funding costs, bank risk and income diversification. We find that the impact of low rates on the profitability of banks' traditional intermediation activity helps explain the subdued evolution of lending in the period 2010-14.

Keywords: Bank lending, monetary transmission mechanisms, low interest rate environment

JEL Classification: E44, E51, E52

Suggested Citation

Borio, Claudio E.V. and Gambacorta, Leonardo, Monetary Policy and Bank Lending in a Low Interest Rate Environment: Diminishing Effectiveness? (February 2017). BIS Working Paper No. 612. Available at SSRN: https://ssrn.com/abstract=2924917

Claudio E.V. Borio (Contact Author)

Bank for International Settlements (BIS) - Research and Policy Analysis ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Leonardo Gambacorta

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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