The role of bank capital through monetary policy transmission mechanism

Abstract

This study examines the role of bank capital in the transmission of monetary policy, considering the bank lending channel (BLC) and financial development. Analyzing bank-level data from nine countries during 2007-2021 with GMM method, the study finds that well-capitalized banks are better positioned to expand loan supply and withstand adverse shocks. However, behavioral patterns differ between developed and ASEAN countries. In developed nations, policy rate changes have inconclusive effects on loan growth, while profitable banks and inflation drive credit expansion. In ASEAN countries, policy rate increases are associated with loan growth, reflecting favorable economic conditions. Financial development impacts credit expansion differently in developed and ASEAN countries, with improved financial systems mitigating shocks in ASEAN. These findings emphasize the importance of bank capital and the need for policymakers to consider bank capital and financial development in designing effective monetary policies.