| Information asymmetries that arise between borrowers and lenders in the market for intermediated credit make borrowing harder for firms with high information costs. Similar information problems are believed to exist between banks and their depositors, and this, due to funding problems, makes the loans of high information-cost banks more sensitive to monetary policy changes. In this work it is suggested that a bank's financial strength signals to its investors how risky the uninsured liabilities of this bank are, making the supply of its loans more vulnerable to monetary policy changes. Examination of cross-sectional differences in bank lending responses is important since the presence of such differences would imply that monetary policy changes primarily affect the supply of bank credit, which is the essence of the “credit” channel. Another issue examined in this work is how monetary policy transmission has changed over time because of innovations in the banking sector. The study employs quarterly data on individual commercial banks over the period of 1987Q4–2002Q1. As expected, loans issued by financially weak banks are found to respond more to monetary policy actions, and the observed pattern is primarily driven by the behavior of real estate loans. Regarding intertemporal changes in monetary policy transmission, the study's results indicate that the impact of monetary policy on bank lending has increased over time. This improvement is believed to be a result of better expectations of the Federal Reserve's policy since 1994, a fact documented by other researchers. |
