DP4725 Banks' Loan Portfolio and the Monetary Transmission Mechanism

Author(s): Wouter Den Haan , Steven Sumner , Guy Yamashiro

Publication Date: November 2004

Keyword(s): hedging , bank capital regulation , interest rates

JEL(s): E40

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP4725.asp

This Paper compares the responses of bank loan components to a monetary tightening with the responses to negative output shocks. Real estate and consumer loans sharply decrease during a monetary tightening but not after a negative output shock. In contrast, C&I loans (and commercial paper) sharply decrease in response to output shocks, but not in response to a monetary tightening. These results are difficult to reconcile with a bank-lending channel of monetary transmission, in which the supply of commercial and industrial (C&I) loans is constrained. Hedging and bank capital regulation provide reasons why banks may want to substitute out of real estate and consumer loans, and into C&I loans during periods of high interest rates.