Can Monetary Policy Affect Bank Behaviour? Evidence from Bank Credit Standards

Abstract

We examine whether conventional monetary policy has an impact on bank credit standards (CS) through the manipulation of interest rates. Using three distinct methodologies, to provide more insights and perspectives to this relationship, the results confirm that the policy rate appears to have a positive relationship with CS, that is an increase in interest rates would, ceteris paribus, lead to a tightening of CS. However, this effect is not found to be large and, most importantly, it is likely to be outweighed by the presence of counteracting factors, the most notable of which is private consumption. Other macroeconomic factors such as inflation, investment, and housing prices also have an impact on bank CS, the size of which varies across specifications. The empirical results suggest that while the interest rate can cool off banking behaviour, ceteris paribus, that is if no change in the economy takes place, this is not likely a realistic scenario. (JEL codes: E51, E52, E58, and G21)