TAILIEUCHUNG - BIS Working Papers No 297 The bank lending channel revisited

Aggregate saving is an important source of funds for domestic investment and economic growth and thus the question of what determines its level and rate remains a crucial research and policy agenda. Moreover, in the face of volatile flows of external finance, domestic saving has become even more critical for economic development. In particular, the recent financial turmoil in developing countries, brought about by rapid cross-border movements of capital, has led many countries to seriously consider a larger role for domestic saving (excluding net factor income from abroad) as a source of investment funds. Likewise, savings at the household level. | BANK FOR INTERNATIONAL SETTLEMENTS BIS Working Papers No 297 The bank lending channel revisited By Piti Disyatat Monetary and Economic Department February 2010 JEL Classification E40 E44 E51 E52 E58. Keywords Monetary Policy Bank Lending Channel Bank Capital Credit Money. BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements and from time to time by other economists and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. Copies of publications are available from Bank for International Settlements Communications CH-4002 Basel Switzerland E-mail publications@ Fax 41 61 280 9100 and 41 61 280 8100 This publication is available on the BIS website . Bank for International Settlements 2010. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1020-0959 print ISBN 1682-7678 online The Bank Lending Channel Revisited Piti Disyatat Bank for International Settlements Abstract A central proposition in research on the role that banks play in the transmission mechanism is that monetary policy imparts a direct impact on deposits and that deposits insofar as they constitute the supply of loanable funds act as the driving force of bank lending. This paper argues that the emphasis on policy-induced changes in deposits is misplaced. A reformulation of the bank lending channel is proposed that works primarily through the impact of monetary policy on banks balance sheet strength and risk perception. Such a recasting implies contrary to conventional wisdom that greater reliance on market-based funding enhances the importance of the channel. The framework also shows how banks depending on the strength of their balance sheets could act either as absorbers or amplifiers of shocks originiating in the .

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