Monetary Policy Transmission and the Funding Structure of Banks

Finance

Speaker:Emily Williams, London Business School
Website: https://www.london.edu/programmes/phd/profiles/emily-williams#.WP3uR2fatpg
Date: Tuesday 6 June 2017
Time: 1.45 pm
Location: Constantine Leventis Teaching Room

Further details

Abstract: I document size-related _financing frictions at U.S. commercial banks and show that these frictions lead to a reduction in bank lending when the Federal Reserve raises interest rates. I identify these effects by exploiting a natural experiment using anti-trust related bank branch divestitures in which branches are divested from large banks to small banks such that the market structure remains unchanged. Consistent with the existence of financing frictions in a framework where deposit demand is a function of the opportunity cost of money, I find that deposit rates increase more and deposit quantities decrease less at divested branches when the Federal Funds rate increases. I further find that these size-related financing frictions affect lending and real outcomes: when the Federal Reserve raises rates by 0.5%, small business lending declines by 1.5% more in areas with branches newly owned by small banks -which translates to a reduction in total lending at small banks of approximately 0:9% - and growth in the number of small businesses declines. Collectively, these results are consistent with the existence of a bank lending channel of monetary policy.