Bank Size and the Transmission of Monetary Policy

UNIVERSITY OF TECHNOLOGY SYDNEY
Finance Department
Research Seminars in Finance

Topic: Bank Size and the Transmission of Monetary Policy: Revisiting the Lending Channel

Speaker: Hassan Naqvi, Monash University

Abstract: We develop a model that analyzes how monetary policy shocks affect bank lending under both tight and loose monetary policy regimes. Other things being equal, large banks are perceived to be safer than smaller banks given that the "too big to fail" argument implies that such banks are more likely to be bailed out in the event of failure. Consequently, in an era of low interest rates the portfolios of large banks are relatively more sensitive to changes in monetary policy compared to smaller banks given that smaller banks are unable to finance liquidity shocks at a rate below a certain threshold which reflects their higher risk. Conversely, under a tight monetary policy regime, the portfolios of smaller banks are more sensitive to any changes in monetary policy since smaller banks face a higher cost of financing any liquidity short- falls. Our empirical results strongly support our hypothesis. In particular, we find that monetary policy has an asymmetric impact on the lending of small versus large banks: under a tight monetary regime smaller bank lending is more sensitive to any changes in the federal funds rate whilst under a loose monetary regime the portfolios of larger banks are more responsive to any changes in the federal funds rate.

Date: Wednesday, 21 August 2019
Time: 12.00 – 1.00 p.m.
Venue: University of Technology, Sydney
               Building 8, Room 08.002, Dr Chau Chak Wing Building
               Dr Chau Chak Wing Building
              14 - 28 Ultimo Road, Ultimo

Co-ordinator: Claire Liu  (Ph: +61 2 9514 7748)

Enquiries: Mala Kapahi (Ph: +61 2 9514 7777)