Bank Losses, Monetary Policy and Financial Stability—Evidence on the Interplay from Panel Data

September 1, 2008

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Lea Zicchino, and Erlend Nier. Bank Losses, Monetary Policy and Financial Stability—Evidence on the Interplay from Panel Data, (USA: International Monetary Fund, 2008) accessed October 6, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We assess the extent to which loan losses affect banks’ provision of credit to companies and households and examine how feedback from losses to a reduction in credit is affected by the monetary policy stance. Using a unique cross-country dataset of more than 600 banks from 32 countries, we find that losses lead to a reduction in credit and that this effect is more pronounced when either initial bank capitalization is thin or when monetary policy is tight. Moreover, in the face of credit losses, ample capital is more important in cushioning the effect of loan losses when monetary policy is tight. In other words, capital buffers and accommodating monetary policy act as substitutes in offsetting the adverse effect of losses on loan growth. While most of these effects are stronger in crisis times, we find them to operate both in and outside full-blown banking crises. These findings have important implications for the interplay between financial stability and monetary policy, which this paper also draws out.

Subject: Bank credit, Banking, Banking crises, Credit, Loans

Keywords: Bank capital channel, Lending response, Loan growth, Loan loss, Monetary policy indicator, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/232
Stock No:

WPIEA2008232
ISBN:

9781451870909
ISSN:

1018-5941

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