Role of banks in the Czech monetary policy transmission mechanism

Role of banks in the Czech monetary policy transmission mechanism

Published Jan 2004

Author

A. Pruteanu

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How have the Czech commercial banks’ lending structure and attitudes changed?

What is the impact of monetary policy changes on the growth rate of loans and the characteristics of the supply of loans in the Czech Republic for the period 1996–2001?

The study uses a panel of quarterly time series for Czech commercial banks to study fluctuations in total client loans and fluctuations in the sub-group of client loans to residents over two consecutive time periods: 1996–1998 and 1999–2001. Significant differences are found between the results characterizing the two time periods as well as between the results characterizing banks belonging to different ownership groups.

The author believes that the stronger impact of monetary conditions on the growth rate of client loans in the period 1999–2001 can be explained by the 1998 introduction of a new monetary policy regime, followed by an easing of monetary conditions, coupled with the unprecedented development of the banking sector and the recovery of demand after the 1997 crisis.

Further major findings are:

  • bank size impinges negatively in both periods on the growth rate of total client loans, the highest magnitude being within foreign branches (especially for loans to residents)
  • capitalisation seems to positively influence the lending of banks with mainly Czech and foreign participation during the first period only
  • the degree of liquidity has a supportive effect on the growth rate of loans, especially during the second period for branches of foreign banks and banks with mainly Czech participation
  • the ratio of classified loans to total loans has a positive impact on the growth rate of loans in the first period and a negative effect in the second period within banks with mostly Czech participation and branches of foreign banks
  • the previous point implies that Czech banks faced soft budget constraints in the first period and non-performing-loans-related reluctance to lend out in the second period
  • bank capitalisation has influenced the monetary policy impact on bank lending at a time when differences in the degree of capitalisation could have impeded less capitalized banks’ ability to acquire external finance on the interbank market during the episodes of monetary tightening
  • bank liquidity affects the lending reactions to monetary policy, but only within banks with mostly Czech participation<\UL>

    Finally, the author finds that bigger banks are less prone to increasing their growth rate of loans when monetary policy is relaxed which can be perceived as evidence of a broad credit channel.

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