16 - Is there a bank-lending channel of monetary policy in Spain?

Summary

Introduction

This chapter explores the response of bank-loan supply to monetary policy changes in Spain. Results in Ehrmann et al. (chapter 14 in this volume) show that, after a tightening in monetary policy, those Spanish banks with less liquid assets, relative to total assets, reduce their loan growth by more than more liquid banks, whereas no difference is found in the response of big and small banks and well- and poorly capitalised banks. Under the usual assumption that more and less liquid banks face the same loan demand function, this differential response can be interpreted as a loan-supply movement, implying the existence of a bank-lending channel of monetary policy transmission in Spain.

However, in the case of Spain, because of the important differences in the composition of bank lending, the differential response across banks may be reflecting either a genuine difference in loan-supply behaviour or a difference induced by the diverse demand-side behaviour of the different types of loans. Moreover, since monetary policy affects both loan supply and loan demand, all tests based on monetary policy shocks are potentially subject to the criticism of not having controlled adequately for differences in loan demand. Fortunately, we have, in the Spanish case, a significant exogenous shock to bank deposits, arising from the tax-induced development of mutual funds during the 1990s, that permits us to carry out an experiment to check whether bank-loan supply is affected by changes in the availability of deposits.