KONSTANTĪNS BEŅKOVSKIS IS THERE A BANK LENDING CHANNEL OF MONETARY POLICY IN LATVIA? EVIDENCE FROM BANK LEVEL DATA

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1 ISBN X KONSTANTĪNS BEŅKOVSKIS IS THERE A BANK LENDING CHANNEL OF MONETARY POLICY IN LATVIA? EVIDENCE FROM BANK LEVEL DATA 2008 WORKING PAPER Lavias Banka, 2008 This source is o be indicaed when reproduced.

2 CONTENTS Absrac 2 Inroducion 3. The Bank Lending Channel 4. Ineres Rae and Credi Channels: a Brief Overview of Theoreical Conceps 4.2 Deerminans of he Bank Lending Channel 6 2. A Shor Descripion of Lavia's Banking Secor 7 2. Imporance of he Banking Secor for Lavia's Financial Sysem Srucure of Lavia's Banking Secor 8 3. Discovering Asymmeries in Bank Lending Behaviour 2 3. A Brief Overview of Previous Empirical Sudies Panel Approach o Idenifying Asymmeries in Bank Lending Esimaion Mehod 6 4. Bank Lending Channel in Lavia: Economeric Esimaions and Resuls 7 4. Daa Issues Bank Loans o Residens Bank Loans o Households and Non-Financial Corporaions Robusness Check Alernaive Specificaions Robusness of he Resuls for Differen Time Periods 30 Conclusion 3 Appendices 33 Bibliography 43 ABBREVIATIONS CPI Consumer Price Index CSB Cenral Saisical Bureau of Lavia ECB European Cenral Bank EURIBOR 3M Euro Inerbank Offered Rae, he index of European inerbank euro credi ineres raes for credis wih a 3-monh mauriy FCMC Financial and Capial Marke Commission GDP Gross Domesic Produc GMM Generalised Mehod of Momens HHI Herfindhal-Hirschman Index LCD Lavian Cenral Deposiory LIBOR SDR 3M he index of SDR ineres raes for credis wih a 3-monh mauriy, calculaed using London Inerbank Offered Rae Indices MFI moneary financial insiuion. Credi insiuions and oher financial corporaions whose business is o receive deposis and/or close subsiues for deposis from eniies oher han MFIs and o gran credi and/or make invesmen in securiies for heir own accoun, as well as naional cenral banks. RIGIBOR 3M Riga Inerbank Offered Rae, he index of Lavian inerbank las credi ineres raes for credis wih a 3-monh mauriy SDR Special Drawing Righs

3 ABSTRACT The goal of his paper is o explore he role of he banking secor in ransmission of he Bank of Lavia's moneary policy and o check he exisence of he bank lending channel in Lavia. For empirical invesigaion of he bank lending channel in Lavia, we use he approach ha builds on he sandard panel regression. The evidence on he bank lending channel is obained by esimaing a bank loan funcion ha akes ino accoun no only he moneary policy indicaor and macroeconomic variables, bu also bank-specific differences in he lending reacion o moneary policy acions. Empirical analysis shows ha some banks in Lavia have saisically significan negaive reacion o a domesic moneary shock; however, he weighed average reacion of he oal las loan growh is no saisically significan. A domesic moneary shock has only a disribuion effec and affecs banks ha are small, domesically owned and have lower liquidiy or capialisaion. The bank lending channel is limied only for he supply of las loans, which dramaically reduces he imporance of his channel. Keywords: moneary policy ransmission, bank lending channel. JEL classificaion: C23, E52, G2 The views expressed in his publicaion are hose of he auhor and do no necessarily represen he official views of he Bank of Lavia. The auhor assumes responsibiliy for any errors or omissions. The auhor wans o hank Mārcis Risbergs (Bank of Lavia for his assisance in daabase creaion, and Vikors Aevskis, Zoa Razmusa, Jeļena Zubkova (Bank of Lavia and Velga Vilne (Financial and Capial Marke Commission for heir valuable commens and recommendaions. 2

4 INTRODUCTION The analysis of he moneary policy ransmission, i.e. how moneary policy changes affec he real economy, is one of he mos researched areas in macroeconomic lieraure and a special focus for cenral bankers. Recen heoreical and empirical findings enlighen, sep by sep, he ransmission process of moneary policy. According o he radiional ineres rae channel, a change in policy-induced ineres raes influences he real economy by affecing various relaive prices. A higher cos of capial increases he reurns required for an invesmen proec and, herefore, diminishes invesmen expendiures. Changes in ineres raes also affec consumpion, as higher ineres raes decrease he price of fuure consumpion. In he case of a flexible exchange rae regime, ineres rae movemens affec he nominal exchange rae, price compeiiveness and hence also ne expors. However, he ineres rae channel heory ignores some imporan processes in he banking secor. The credi channel view acknowledges he exisence of informaional imperfecions in financial markes and assigns an acive role o he supply of bank loans in moneary ransmission via wo "subchannels" he balance shee channel, which saes ha igh moneary policy may worsen borrowers' risk characerisics and reduce he supply of loans, and he bank lending channel, which saes ha he cenral bank policy can affec bank balance shees and hence also he supply of loans. The laer, i.e. he bank lending channel, is of especial ineres for us in his paper, as i focuses more specifically on he paricular role of banks in he ransmission mechanism. The exisence of he bank lending channel has a very imporan implicaion for moneary policy: he ransmission process of moneary policy depends on he srucure of he financial sysem. This means ha srucural changes in financial area may affec moneary ransmission. Moreover, moneary policy can also have a disribuion effec, as individual banks wih differen specific (or individual characerisics will have an asymmeric reacion o moneary shock. The goal of his paper is o explore he role of he banking secor in ransmission of he Bank of Lavia's moneary policy and o check he exisence of he bank lending channel in Lavia. For his purpose, we use microeconomic daa ha help o solve he idenificaion problem of loan supply effec versus loan demand effec of moneary policy. The approach used in he paper builds on currenly very widely acceped sandard panel regression mehodology. Evidence on he bank lending channel is obained by esimaing a bank loan funcion using daa of individual banks. This funcion akes ino accoun no only he moneary policy indicaor and macroeconomic variables bu also bank-specific differences in lending reacion o moneary policy acions. The main quesion is wheher here are cerain ypes of banks ha show a relaively srong decrease in lending afer moneary ighening. The srucure of he paper is as follows. Secion provides a brief heoreical overview of moneary ransmission channels wih a special focus on he bank lending channel. The main feaures of Lavia's banking secor are described in Secion 2. A shor overview of empirical research and descripion of he model and economeric mehodology are presened in Secion 3. Empirical resuls on he bank lending channel in Lavia are discussed in Secion 4, while Secion 5 checks he robusness of hese resuls. The las secion concludes. 3

5 . THE BANK LENDING CHANNEL. Ineres Rae and Credi Channels: a Brief Overview of Theoreical Conceps According o he radiional ineres rae channel (or money channel, a change in policy-induced ineres raes affecs long-erm ineres raes, which, in urn, influence he real economy by impacing various relaive prices in he economy. The emphasis of ineres rae ransmission mechanism is on he real raher han nominal ineres rae and he long-erm raher han shor-erm ineres rae.(27 The key is sicky prices, so ha expansionary moneary policy ha lowers he shor-erm nominal ineres rae also lowers he shor-erm real ineres rae. The expecaions hypohesis of he erm srucure suggess ha a lower real shor-erm ineres rae leads o a fall in he real long-erm ineres rae. In an overview of compeing views on moneary ransmission, Ch. Bean e al. (4 denoe he following ingrediens of he ineres rae channel. Firs, higher ineres raes and herefore higher cos of capial induce increasing reurns required for an invesmen proec and diminishing invesmen expendiures. Second, an increase in ineres raes alers consumpion: he impac of moneary ighening can be decomposed ino a subsiuion and income effec. The former is negaive, as higher ineres raes decrease he price of fuure consumpion, while he laer depends on ne asse posiions of consumers. Third, in he case of a flexible exchange rae regime, ineres rae movemens make he exchange rae volaile hereby alering price compeiiveness and affecing ne expors. Ineres rae movemens will also have an impac on he supply side of he economy hrough ineremporal subsiuion in labour supply. The ineres rae channel heory assumes ha financial inermediaries do no play any special role in he economy. B. S. Bernanke and A. S. Blinder (5 show ha he radiional ineres rae channel relies on a leas one of he hree assumpions: loans and bonds are perfec subsiues o borrowers, 2 loans and bonds are prefec subsiues o lenders, or 3 he commodiy demand is insensiive o loan rae. The poin of deparure of he credi view is he reecion of he assumpion ha bonds and bank loans are perfec subsiues. B. S. Bernanke and M. Gerler (6 sae ha "..according o he credi channel heory, he direc effecs of moneary policy on ineres rae are amplified by endogenous changes in he exernal finance premium, which is he difference in cos beween funds raised exernally (by issuing equiy or deb and funds generaed inernally (by reaining earnings. The size of he exernal finance premium reflecs imperfecions in he credi markes ha drive a wedge beween he expeced reurn received by lenders and he coss faced by poenial borrowers. According o he credi view, a change in moneary policy ha raises or lowers marke ineres raes ends o change he exernal finance premium in he same direcion". Based on he assumpion of informaional imperfecions in financial markes, he credi channel assigns an acive role o he supply of bank loans. Therefore, he credi channel sipulaes ha moneary policy can affec no only he demand for loans, bu also he supply of loans. B. S. Bernanke and M. Gerler (6 define wo "subchannels" of he credi channel: 4

6 balance shee channel (or broad credi channel wih a focus on poenial impac on borrowers' balance shees and income saemens; bank lending channel (or narrow credi channel wih a focus on he supply of loans by credi insiuions. The balance shee channel does no specifically concenrae on bank loans bu refers more generally o he overall supply of funds. This channel may work even if loans and bonds are perfec subsiues in he balance shees of banks and firms. The balance shee channel is based on he assumpion ha he exernal finance premium should depend on borrower's financial posiion. Moneary policy changes can affec he borrowers' risk characerisics, as higher ineres raes are expeced o weaken he borrowers' financial posiion. According o B. S. Bernanke and M. Gerler (6, a igh moneary policy weakens direcly he borrowers' balance shees in wo ways. Firs, higher ineres raes increase ineres paymens, weakening he financial posiion of borrowers. Second, rising ineres raes are ypically associaed wih declining asse prices, which reduce he value of borrowers' collaeral. Moreover, a igh moneary policy may influence he financial posiion indirecly, decreasing he demand for firm's oupu, while various fixed coss do no adus in he shor run. A change in borrowers' risk ranslaes ino a shif in he supply curve of funds due o he exisence of asymmeric informaion among lenders and borrowers. The bank lending channel focuses more narrowly on he special role of banks in he moneary ransmission mechanism, as moneary policy may also affec he exernal finance premium by shifing he bank loan supply. This channel may be a work only under he following condiions. Moneary policy should significanly affec he supply (or relaive pricing of bank loans. The model designed by B. S. Bernanke and A. S. Blinder (5 suggess ha a igh moneary policy affecs he reserve posiions of banks, also influencing he supply of bank loans. The key assumpion is ha, following a reducion in reserves, banks canno urn freely o he bond marke due o exernal finance premium. In oher words, deposis and bonds should be imperfec subsiues for banks. Bank loans and bonds should be imperfec subsiues for borrowers and changes in loan supply should affec real aciviy. B. S. Bernanke and M. Gerler (6 argue ha his condiion is very likely as banks remain he dominan source of inermediaed credi specialising in overcoming informaional problems and oher fricions in credi markes. The balance shee and bank lending channels should no be considered as an alernaive o he radiional moneary ransmission mechanism. B. S. Bernanke and M. Gerler (6 sress ha "..we don' hink of he credi channel as a disinc, freesanding alernaive o he radiional moneary ransmission mechanism, bu raher as a se of facors ha amplify and propagae convenional ineres rae effecs. For his reason, he erm "credi channel" is somehing of a misnomer; he credi channel is an enhancemen mechanism, no a ruly independen or parallel channel". 5

7 In addiion, unlike he sandard ineres rae channel, he impac of moneary policy on he real economy, working hrough he balance shee and bank lending channels, has imporan disribuional consequences. Banks of differen deposi dependence and firms wih differen financial posiions and dependence on bank loans are unlikely o be equally affeced by moneary policy shocks..2 Deerminans of he Bank Lending Channel According o heoreical conceps, he wo necessary condiions for he exisence of he bank lending channel are he abiliy of moneary policy o affec he bank loan supply, and imperfec subsiuion beween bank loans and bonds for borrowers. Consequenly, he significance of he bank lending channel is deermined by wo facors: he srengh of moneary policy impac on he bank loan supply, and dependency of borrowers on bank loans. The effec of moneary policy on he supply of bank loans depends on he characerisics of he banking secor. Overall, he sronger he naion's banking secor, he weaker he expeced impac of policy movemens is; balance shees of large, healhy banks are no sensiive o policy because heir reserve conracion can be readily offse wih alernaive forms of financing wihou involving reserve requiremens.(9 There are various indicaors of financial srengh of he banking secor in he lieraure. The size of banks, marke concenraion, capialisaion and liquidiy are among he commonly menioned facors.(9; 0 A relaively small size of banks, weak bank marke concenraion, low liquidiy and capialisaion would sugges a sronger lending channel, as such banks are more exposed o marke imperfecions and will face more difficulies in aracing non-deposi financing. Financial srengh is also characerised by loan loss provisions, operaing coss and reurn on asses as well as he number of bank failures in he pas. Anoher imporan facor is ownership srucure of he naional banking secor. Sae influence exered eiher hrough direc public ownership of banks, sae conrol or public guaranees provides addiional funding possibiliies and reduces informaional asymmeries. Foreign involvemen in he domesic banking secor also weakens he bank lending channel, as foreign bank subsidiaries may face fewer financing consrains due o poenial supply of addiional funding from heir paren banks.(5; 0 A. K. Kashyap and J. C. Sein (20 argue ha he effec on he bank loan supply depends on he regulaory framework, as risk-based capial requiremens can ie a bank's abiliy o exend loans o is level of equiy capial and consrain lending. On he oher hand, bank lending behaviour could be also affeced by deposi insurance requiremens, as high deposi insurance decreases he risk level for cliens. A lower risk level reduces deposi coss for banks, hus increasing bank dependency on his ype of liabiliies. Finally, he speed of moneary ransmission depends on he bank loan mauriy and ineres rae ype. The bigger he share of shor-erm loans wih a floaing ineres rae, he faser he response of loan supply o changes in moneary policy will be. 6

8 Regarding dependency of borrowers on bank loans, i is usually explained by he fac ha banks play a special role in he financial sysem because hey are paricularly well suied o solve asymmeric informaion problems in credi markes.(27 The bank-dependen borrowers small and medium sized firms and households suffer mos from he asymmeric informaion problems. The higher he share of such borrowers in he credi marke, he higher he bank-dependency raio is. Moreover, he bank dependency is also driven by availabiliy of non-bank finance. Relaively low capial marke capialisaion compared wih he bank asses and loans implies higher bank dependency and sronger bank lending channel of moneary ransmission. 2. A SHORT DESCRIPTION OF LATVIA'S BANKING SECTOR 2. Imporance of he Banking Secor for Lavia's Financial Sysem The banking secor plays a significan role in Lavia's economy and dominaes oher ypes of financial inermediaion (see Table 2.. The developmen of he banking secor was exremely dynamic during he las years, wih he bank oal asse raio o GDP increasing from 77% in 2002 o more han 40% in The growh of bank loans o residens was even more rapid, and heir raio o GDP increased almos hreefold beween 2002 and 2006 mosly due o he growh in loans o households. In 2006, he share of households in oal loans o residens was almos one half. Table 2. Financial inermediaion in Lavia (% o GDP Toal bank asses Bank loans o residens of which: o non-financial corporaions o households Leasing companies' asses Invesmen fund asses Privae pension fund asses Insurance corporaions' asses Ousanding deb securiies of corporae secor of which non-banks Sock marke capialisaion of which non-banks Sources: Bank of Lavia, FCMC, CSB, Riga Sock Exchange and LCD. Oher ypes of financial inermediaion are less imporan and heir developmen is no so impressive, excep for leasing companies' asses o GDP ha doubled during he given four year period. Alhough he increase in asses of invesmen funds was impressive as well, heir relaive size is sill negligible. The asses of privae pension funds and insurance corporaions were almos unchanged relaive o GDP during he observed period. Sock marke capialisaion o GDP was 2.7%, quie low compared wih bank oal asses and loans. The deb securiies marke is sill undeveloped in Lavia; moreover, i is dominaed by bank deb securiies. 7

9 Table 2.2 Inernaional comparison The relaive size of Lavia's banking secor is comparable wih ha of developed counries (see Table 2.2 for inernaional comparison. Toal asses of Lavia's banks o GDP are lower han in he euro area and is wo larges counries Germany and France. However, he relaive level of bank loans o non-financial corporaions is quie comparable wih euro area figures. I is ineresing o noe ha bank oal asses and loans o non-financial corporaions relaive o GDP are wo imes higher in Lavia han in he USA. In conras o he banking secor, he sock and deb securiies markes are significanly weaker han in he developed counries. Lavia's sock marke capialisaion o GDP is 0 imes smaller han in he USA and 5 7 imes smaller han in he euro area. This gap is even larger for he deb securiies marke. (end of 200; % o GDP USA Euro area Germany France Lavia Toal bank asses Bank loans o non-financial corporaions Ousanding deb securiies of non-financial corporaions Sock marke capialisaion Sources: (0, Bank of Lavia, Riga Sock Exchange and LCD. The facs above prove he dominan role of Lavia's banking secor in financial inermediaion sysem, which resuls in a high degree of bank dependency of local borrowers. This dependency is especially pronounced because of a high share of loans o households in he oal bank loan porfolio. 2.2 Srucure of Lavia's Banking Secor A he end of 2006, here were 2 banks in Lavia (of which nine were subsidiaries of foreign banks and hree branches of foreign banks (see Table 2.3. The number of banks was almos unchanged during he las five years, while here was an increase in he number of foreign branches and subsidiaries. Alhough he number of banks is relaively large aking ino accoun he size of Lavia's populaion (here is one bank per 95 housand inhabians, he banking secor is dominaed by few large banks, while oher banks are relaively unimporan. A he end of 2006, he marke share of he five larges banks in Lavia amouned o almos 70% of oal asses and deposis, and consiued more han 75% of all loans graned. HHI also shows a high degree of concenraion (in 2006, HHI for asses was 0.27; for comparison, for asses for he euro area was only The high degree of concenraion indicaes he dominance of large banks and is a facor ha weakens he imporance of he bank lending channel in Lavia. As regards he ownership srucure, we ge conroversial signals abou he srengh of he lending channel. On he one hand, Lavia's banks are mainly owned by nonresidens, wih he share of foreign ownership rising o almos 70% of paid-up End of 2006 for Lavia. Bank loans o non-financial corporaions only include loans o domesic enerprises. 8

10 capial a he end of This should weaken he lending channel because banks wih foreign ownership have addiional possibiliies o find non-deposiory financing afer a moneary policy shock. Table 2.3 Size and ownership srucure of Lavia's banking secor Number of banks Banks and branches of foreign banks Branches of foreign banks 3 Subsidiaries of foreign banks Marke concenraion (% Marke share of five larges banks of asses of loans of deposis HHI 2 of asses of loans of deposis Ownership Non-residen ownership (% of paid-up capial Governmen ownership (% of paid-up capial Source: Bank of Lavia. On he oher hand, Lavia's banking secor has a low level of governmen paricipaion (here is only one bank owned by he Governmen, while oher banks have no governmen presence a all. Governmen involvemen usually provides some addiional funding possibiliies; herefore, he low level of Governmen's presence in he banking secor of Lavia does no weaken he poenial bank lending channel. Table 2.4 shows he asse and liabiliy srucure of Lavia's banking secor as well as bank profiabiliy. Toal bank asses increased rapidly during he las five-year period and were more han 40% o GDP in The growh of oal loans ouperformed ha of asses, and he share of loans in oal asses increased from one half in 2002 o more han wo hirds in This growh in loans was mainly driven by loans o residens. Moreover, i was mosly deermined by loans issued in foreign currency. The share of loans in las in oal asses and oal loans even decreased during he las years of he sample period, and only one fourh of loans o domesic borrowers were in las a he end of The small share of loans in naional currency weakens he bank lending channel, as he domesic moneary policy primarily affecs he availabiliy of las resources o domesic banks. 2 HHI is calculaed as a sum of he squares of marke shares of individual banks. Larger HHI denoes a higher degree of concenraion. 9

11 Table 2.4 Main indicaors of Lavia's banking secor Asses Toal asses (millions of las Toal asses o GDP (% Loans Toal loans o asses (% Loans o residens o asses (% Loans o residens in las o asses (% Loan qualiy Non-performing loans o oal loans (% Specific provisions for claims on non-banks o non-performing loans (% Loan collaeral Wihou collaeral (% Morgages (% Commercial pledge (% Deposis Toal deposis o asses (% Demand deposis o asses (% Liabiliies o MFIs Liabiliies o MFIs (excep Bank of Lavia o asses (% Liquidiy Liquidiy raio 3 (% Capial adequacy Required capial adequacy (% 0 0 0/ Capial adequacy raio 5 (% Profiabiliy Reurn on asses Reurn on equiy Sources: Bank of Lavia, FCMC. The expansion of banking loans did no decrease he qualiy of loans, however. On he conrary, he share of non-performing loans o oal loans decreased from 2% in 2002 o 0.4% in 2006, indicaing a good qualiy of loan porfolio. Moreover, specific provisions fully covered non-performing loans a he end of Almos all loans have collaeral, eiher a morgage or commercial pledge. These facs sugges ha he developmen of Lavia's banking secor did no come a he cos of financial srengh and asse qualiy ha would reduce he significance of he bank lending channel in moneary ransmission. The share of deposis in oal liabiliies diminished o less han a half, indicaing ha he growh of deposis lagged behind he growh of oher liabiliies. Two hirds of all deposis were demand deposis. Relaively slower growh of deposis was compensaed by a rapid increase in liabiliies o MFIs (excep he Bank of Lavia, 3 Liquidiy raio is calculaed as asses wih mauriy of up o 30 days raio o liabiliies wih mauriy of up o 30 days. 4 Required capial adequacy was reduced from 0% o 8% in he fourh quarer of Capial raio o risk-weighed asses. 6 The raio of profi/loss o asses. 7 The raio of profi/loss o capial and reserves. 0

12 mainly paren banks. During he las wo years, growing liabiliies o MFIs (excep he Bank of Lavia financed he high growh in bank loans, ouperforming he growh in bank deposis (see Char 2.. The share of liabiliies o financial insiuions in oal liabiliies shows ha Lavia's banks (a leas hose wih foreign ownership have an imporan source of non-deposi financing ha significanly decreases heir suscepibiliy o moneary shocks and poenial srengh of he bank lending channel. Source: Bank of Lavia. Due o he expansion of loan porfolio and he reduced required capial adequacy raio, bank liquidiy and capial adequacy raios, alhough sill remaining a a high level, decreased in This could be seen as a facor increasing he imporance of he bank lending channel over ime. Profiabiliy of he banking secor during he observed period was high boh looking a reurns on asses and reurns on equiy, which poins o he financial srengh of Lavia's banks and should reduce he significance of he bank lending channel. Lavia has a well-esablished deposi insurance sysem. According o he Deposi Guaranee Law of he Republic of Lavia passed on 3 June 998, he amoun of guaraneed compensaion o one deposior for a deposi made wih a bank, a branch of a foreign bank or a credi union shall be in he amoun of he guaraneed compensaion, bu no exceeding euro as of January The deposi insurance sysem can increase he dependency of banks on deposi financing, srenghening he lending channel of moneary ransmission. To sum up, he descripive evidence on he srengh of he lending channel in Lavia is mixed. Mos of he facors, e.g. marke concenraion, high degree of non-residen ownership leading o a significan level of liabiliies o foreign MFIs, low share of loans in las, good qualiy of loan porfolio and profiabiliy, indicae ha he lending channel should be weak. On he oher hand, he high degree of bank dependency of local borrowers, low level governmen presence as well as decreased liquidiy and capial raios speak in favour of he presence of he lending channel. Moreover, Lavia's banking secor is raher diversified, and here are a large number of smaller banks whose balance shee srucure and hence liquidiy and capial adequacy indicaors, among ohers, diverge subsanially from banking secor's averages. Therefore, in order o draw conclusions abou he role of Lavia's banking secor in moneary policy ransmission, we need o perform some formal empirical ess. 8 Unil he end of 2007, he maximum compensaion amoun was euro.

13 3. DISCOVERING ASYMMETRIES IN BANK LENDING BEHAVIOUR 3. A Brief Overview of Previous Empirical Sudies The issue of he bank lending channel has deserved special aenion of researchers in he las 20 years. Early empirical sudies focused on macroeconomic evidence, as perhaps he simples implicaion of he lending channel is ha bank loans should be closely correlaed wih moneary policy measures. For insance, B. S. Bernanke and A. S. Blinder (5 find ha increases in he US federal funds rae urge banks o slow down he loan growh. However, while correlaions beween policy indicaors, bank loans and aciviy are consisen wih he credi view, such evidence canno provide unambiguous suppor o he lending view. A. K. Kashyap and J. C. Sein (20; 2 argue ha anoher way o read hese resuls is ha a igh moneary policy operaes hrough sandard ineres rae channels o depress economic aciviy and o reduce he demand for credi. Consequenly, here can be an induced correlaion beween aciviy and bank lending even if here is no lending channel. To overcome he idenificaion problem, he use of disaggregaed daa on bank balance shees was proposed. If he credi view is correc, one should expec loan porfolios of banks wih differen characerisics o respond differenly o a conracion in moneary policy.(2; 22 According o he lending channel heory, informaional imperfecions in financial markes ha creae bank loan supply effecs of moneary policy also resul in differenial loan supply responses across banks. The underlying assumpion is ha he more difficul i is for a bank o offse he effecs of a resricive moneary policy measure, he higher he degree o which i suffers from asymmeric informaion vis-à-vis is suppliers of funds. As a resul, he use of microeconomic daa became he dominan empirical mehod of invesigaing he exisence of bank lending channel in recen years. For example, A. K. Kashyap and J. C. Sein (22 found ha wihin he group of small banks changes in moneary policy maer more for loans of he banks wih he leas liquid balance shees. Building on hese resuls, hey argue in favour of he exisence of a lending channel for he Unied Saes. There is a lo of empirical evidence on operaional lending channels in European counries as well. M. Ehrmann e al. (0 found ha for he euro area liquidiy is an imporan indicaor of bank reacion o a moneary policy acion, wih less liquid banks reacing more srongly han more liquid banks, alhough no in all counries. On he oher hand, such facor as he size of a bank or he degree of is capialisaion is generally no imporan for he way a bank aduss is lending o ineres rae changes. The exisence of he lending channel has been ascerained by numerous researches a an individual counry level. A. Worms (34 repors ha in Germany he average bank response o moneary policy mainly depends on is share of shor-erm inerbank deposis in oal asses, hence also on is liquidiy. The resuls of research by L. de Haan (4 sugges ha a lending channel is operaive in he Neherlands. I. Hernando and J. Marínez-Pagés (6 have found some evidence ha less liquid banks in Spain may display a sronger response han banks wih a higher degree of liquidiy, alhough his evidence seems o be suppored mosly by a loan porfolio composiion effec. C. Loupias e al. (25 repor on some asymmery beween liquid 2

14 and illiquid banks in France. Similar resuls have been obained for Ialy by L. Gambacora (3. Recenly, he exisence of he bank lending channel was examined also in Eas European counries. A. Prueanu (30 deeced a bank lending channel for in he Czech Republic, wih capialisaion influencing he impac of moneary policy on bank lending. Also, liquidiy appears o make differences in he reacion of lending o moneary policy, bu only wihin banks wih mosly Czech paricipaion. C. Horváh e al. (7 found heerogeneiy among banks in he maoriy of cases for Hungary. In general, ha can be aken as a suppor for he bank lending channel, especially because i was found ha he demand for loans can be considered reasonably homogenous wih respec o he banking characerisics. Empirical analysis conduced by R. Juks (9 provided evidence in favour of bank lending channel in Esonia, and he liquidiy posiion of Esonian banks seems o be an imporan deerminan of loan supply. To our knowledge, he only paper ha addresses he opic of a lending channel in Lavia by using micro daa is by M. Köhler e al. (24 in which he auhors analyse he role of banks in moneary policy ransmission in he Balic Saes. Their resuls indicae ha small and well-capialised banks reac more srongly o moneary policy shocks. Noneheless, several drawbacks of his paper should be acknowledged. The use of yearly daa aken from he BankScope Daabase of Bureau van Dik significanly decreases he number of observaions. As a resul, he equaions are esimaed by he Ordinary Leas Squares Mehod wih a firs-order auoregressive erm insead of he Generalised Mehod of Momens, wihou aking ino accoun possible endogeneiy of bank specific variables. In addiion, here is no breakdown of loans by domesic currency and foreign currency. We will ry o address hese problems in our paper. 3.2 Panel Approach o Idenifying Asymmeries in Bank Lending The approach we use o invesigae asymmeries in bank lending in Lavia builds on currenly very sandard panel regression inroduced by A. K. Kashyap and J. C. Sein.(2; 22 The evidence on he bank lending channel is obained by esimaing a bank loan funcion ha akes ino accoun no only he moneary policy indicaor and macroeconomic variables bu also bank-specific differences in he lending reacion o moneary policy measures. The main quesion is wheher here are cerain ypes of banks ha show a relaively srong decrease in lending afer moneary ighening. The model is given by he following equaion where he growh rae of loans is regressed on lagged moneary policy indicaors, se of macroeconomic variables and bank specific characerisics. The mos imporan feaure of he model is he inclusion of ineracion erms ha are he produc of Lavia's moneary policy indicaor and bank specific characerisics: Δ ln x k = i, ϕ Δ lny = μ i k = α Δ ln x k = i, φ Δ ln P k = β ΔMP k = * λ Z * i, k k = = β γ Z ΔMP i, ΔMP ε i, [] 3

15 where i =,..., N and =,..., T; x, is loans of bank i in quarer ; i * MP is he foreign moneary policy indicaor; MP is Lavia's moneary policy indicaor; Y is real income; P is he price level; Z, is a se of bank-specific characerisics; i μ i is he bank specific inercep (fixed effec; N is he number of banks; T is he number of observaions. An imporan difference from he radiional panel model is he inclusion of wo moneary policy indicaors in equaion [] due o he specific naure of moneary regime in Lavia. As he exchange rae of las is fixed o euro (prior o 2005, he las was fixed o SDR currency baske, he scope for he moneary policy is raher limied and ineres raes of las are o a large exen driven by changes in he ECB's moneary policy. Therefore we need o disinguish beween he effec of foreign moneary policy and he Bank of Lavia's moneary policy on ineres raes and loan growh. However, we use foreign ineres raes for foreign moneary policy and he spread beween he domesic and foreign ineres raes for domesic moneary policy. I should be noed ha since wo moneary policy indicaors are used in he model, we assume ha only he indicaor of Lavia's moneary policy ineracs wih bank specific characerisics. Therefore a bank lending channel exiss only for domesic moneary policy, while he changes in foreign moneary policy equally affec all domesic ineres raes. Various researchers have suggesed several bank characerisics ha deermine how sensiive differen banks are o changes in moneary policy. The size of a bank is imporan, as he large banks can encouner fewer asymmeric informaion problems han he small ones and herefore may find i easier o raise non-deposi funds in response o a moneary shock.(2 The indicaor for a relaive bank size is calculaed using he following formula: N Si, = ln Ai, ln Ai, [2] N i= where S, indicaes he relaive size of a bank; i A i, is oal asses of a bank; N is he number of banks in period. Anoher bank characerisic is liquidiy. Liquid banks can use liquid asses o proec heir loan porfolios, while i is more problemaic for relaively less liquid banks.(22 4

16 T N L i, Li, Liq = i, A i, T = N i= Ai, where Liq, is relaive liquidiy of a bank; i L i, is liquid asses of a bank, deermined as a sum of cash, claims on he cenral bank and oher credi insiuions as well as fixed-income deb securiies of he cenral governmen. Capialisaion deermines ha well capialised banks have easier access o nondeposi funds and herefore can decrease heir loan supply by a lesser amoun han poorly capialised banks.(29 T N C i, Ci, Cap = i, A i, T = N i= Ai, where Cap, indicaes relaive capialisaion of a bank; i C i, denoes capial and reserves of a bank. Foreign ownership is a characerisic widely used in researches on Easern European banking secors.(30; 7 Banks wih foreign ownership have an addiional access o non-deposi funds and are less sensiive o changes in moneary policy. The radiional way o quanify foreign ownership is a dummy variable, which is equal o for banks ha have paren foreign banks. 9 However, his definiion has wo main drawbacks. Firs, he exisence of a foreign paren bank does no necessarily mean ha i would supply he required funds. Second, in a relaively small sample like ours, here are only few cases when he dummy variable changes during he observed period, which gives rise o some economerical problems while esimaing he coefficien before he foreign ownership variable. To overcome hese problems, we define foreign ownership as a raio of ne liabiliies o paren foreign banks o oal asses, so ha, sricly speaking, his variable reflecs he acual amoun of funds ha domesic banks receive from heir foreign paren banks: NLAi, Fi, = [5] A i, where F, indicaes foreign ownership of a bank; i NLA i, is ne liabiliies o paren foreign banks. The formulaion of bank characerisics in equaions [3] and [4] ses he overall mean of liquidiy and capialisaion equal o zero across ime and banks. In such a way ime changes in average liquidiy and capialisaion are no removed from he analysis. On he oher hand, he definiion of size characerisic in equaion [2] [3] [4] 9 A non-residen bank wih more han 50% of domesic bank's capial. 5

17 3.3 Esimaion Mehod excludes rapid growh of he banking secor, seing he average size of a bank o zero for each poin in ime. In order o avoid differen values of bank characerisic variables for a given quarer, only one lag of specific characerisic variables eners he regression. The long-run coefficiens of he ineracion erm in equaion [] are used o es for he presence of loan supply effecs of moneary policy provided ha all oher variables of he equaion capure sufficienly he loan movemens caused by loan demand or loan supply facors oher han moneary policy. As regards macroeconomic variables, i is a common pracice o include price changes (CPI or GDP deflaor changes and real GDP growh o accoun for he impac of macroeconomic environmen on loan demand. The main drawback of hese variables is an implici assumpion ha he loan demand elasiciies wih respec o GDP growh and inflaion are homogenous across banks. I is possible, for insance, ha banks face differen loan demand because of differen secoral composiion of heir loan porfolios. To overcome his problem, we use such bank-specific real income and price variables (34 which are approximaed by a weighed average of secoral incomes and prices (we use producion secors from NACE classificaion and he households secor as well. Secoral real incomes and prices are weighed by secors' shares in loan porfolio of a bank. The producion secors' real income growh was approximaed by he changes in real value added, whereas he privae households' real income growh by he real wage growh. The bank-specific price growh was calculaed using producion secors' deflaors and CPI. One more obvious candidae for he price variable in equaion [] would be real esae prices, as he share of morgage loans in oal loan porfolio is large. In addiion, he expeced increase in real esae prices was closely conneced wih he growh of morgage loans in Lavia. Unforunaely, we failed o find a reliable indicaor for real esae prices for he ime period used in our sudy. Due o he dynamic naure of he model, a correlaion beween he laggedendogenous variables and he error erm, leading o biased and inconsisen OLS esimaes, is obained.(28 In order o accoun for he auoregressive naure of he model and for he possible endogeneiy of bank characerisics, he Generalised Mehod of Momens (GMM as designed by M. Arellano and S. Bond ( has been used. To eliminae he individual effec from he model, he equaion is firs-differenced. Uilising he orhogonaliy condiions beween lagged values of he dependen variable and disurbances, he lagged values of he dependen variable wih second and more lags serve as insrumens. This ensures efficiency and consisency of esimaed coefficiens in he hypohesis of N and small T, on condiion ha he disurbance in equaion [] is no subec o serial correlaion and he se of insrumen variables is valid. In addiion o he presence of a lagged dependen variable on he righ hand side of he equaion, an endogeneiy problem emerges, as bank loans can be srongly correlaed wih oher balance shee posiions and hence also wih bank specific 6

18 characerisics. In his case, i is no clear which posiion drives he oher. There are wo radiional measures o deal wih his problem. Firs, in order o address possible endogeneiy problems, all righ hand side variables ener he regression wih a leas one lag. Second, lagged levels of predeermined variables (bank specific characerisics should be used as insrumens. The differences of sricly exogenous variables are used as an insrumen as well, and we assume ha moneary policy indicaors, demand and price growh are independen of individual bank loan growh. 0 As esimaion mehodology includes he firs differencing, here should be a presence of firs order auocorrelaion bu no a second order correlaion in he residual erm of he firs difference equaion, which is esed by m and m2 ess. To check he adequacy of he chosen insrumens, we use he Sargan es saisics. Anoher imporan issue is he choice beween -sep and 2-sep GMM esimaor. The difference beween he wo esimaors consiss in specificaion of an individual weighing marix where he 2-sep esimaor uses -sep residuals hus achieving higher efficiency. However, 2-sep sandard errors end o be biased downward in small samples, and -sep resuls are recommended for inferences on coefficiens, alhough he 2-sep Sargan es is recommended for inferences on model specificaion. 4. BANK LENDING CHANNEL IN LATVIA: ECONOMETRIC ESTIMATIONS AND RESULTS 4. Daa Issues The analysis is performed using quarerly daa for he period from he second quarer of 998 unil he fourh quarer of 2006 (35 observaions. Daa on loans and bank specific characerisics are compued from he monhly bank saemens submied o he Bank of Lavia and FCMC by each bank. The sample covers all banks ha were operaing for a leas 2 quarers during he observaion period. Branches of foreign banks were no included in he analysis due o he lack of separaely recorded capial in heir balance shees. We rea mergers in such a way ha banks involved in a merger are consolidaed and subsequenly repored under he absorbing bank for he whole sample period. Thus, banks ha were absorbed are no included in he original sample, which consiss of 23 independen banks. To increase he number of observaions, he esimaion was done for an unbalanced sample. Moreover, despie he rapid developmen and ransformaion of he Lavian banking secor during he observaion period, idenificaion and exclusion of ouliers was no done. As already noed in Secion 3, here are wo moneary policy indicaors in our model due o he need o disinguish beween he effec of foreign moneary policy and Bank of Lavia's moneary policy on domesic ineres raes under fixed exchange rae regime. Foreign moneary policy is represened by changes in EURIBOR 3M ineres rae (prior o 2005, a synheic LIBOR SDR 3M ineres rae was used. 0 I is sill possible ha he loan growh of he larges banks have some influence on domesic variables. However, he exclusion of domesic macroeconomic variables from he insrumen lis has a negligible effec on he resuls. See ( for es descripion. 7

19 The remaining par is represened by changes in he spread beween RIGIBOR 3M ineres rae and foreign moneary policy indicaor (see Char 4.. This spread is parly deermined by he Bank of Lavia's moneary policy, alhough here is a subsanial influence of oher facors as well, e.g. he exchange rae risk or differences in he raings of Lavian and foreign banks; in addiion, he domesic money marke is small and fragmened. Consequenly, he spread beween RIGIBOR 3M and EURIBOR 3M is no only he oucome of Bank of Lavia's moneary policy decisions, and we would raher inerpre his variable as a domesic moneary shock. 4.2 Bank Loans o Residens Sources: Bank of Lavia and ECB. Real income and price variables are consruced as a weighed average of secoral value added and deflaors (real wage rae and CPI used for households, as discussed in Secion 3. I is worh menioning ha daa can be subec o he seasonaliy problem. A way o deal wih i is o include seasonal dummies in equaion [] as was done by J. Topi and J. Vilmunen (32, or S. Kaufmann (23. However, i is possible ha seasonaliy will no be adequaely handled by including seasonal dummies due o a specific seasonal paern of some banks, and seasonal dummies should be used for each bank individually.(6 Unforunaely, he inclusion of individual seasonal dummies will significanly increase he number of esimaed parameers. Therefore, similar o C. Horváh e al. (7, we seasonally adused all balance shee and macroeconomic variables using X-2-ARIMA programme. In he remaining par of Secion 4, we presen he panel esimaion resuls of equaion [] for he growh of bank loans in Lavia. A firs, we examine he loan growh funcion for oal loans o residen non-mfis (excluding governmen as well as he growh of loans separaely in las and in foreign currency. To ge a furher insigh, loans o domesic households and domesic non-financial corporaions are analysed. The m and m2 ess indicae ha he firs-order auocorrelaion is presen in residuals, while he second-order auocorrelaion is no. As noed before, he presence of he firs-order auocorrelaion does no imply inconsisency of he esimaes. However, he presence of he second-order auocorrelaion would imply 8

20 inconsisency. The Sargan es saisics sugges ha a chosen se of insrumens is valid. Table 4. Loans o residen non-mfis in las and foreign currency (long-erm coefficiens, p-values in parenheses Dependen variable: growh of loans o residen non-mfis in las and foreign currency ( Δ ln x i, Sample period: 998 Q Q4 (a (b (c (d (e all 4 size liquidiy capialisaion ownership Domesic moneary shock (0.678 (0.762 (0.904 (0.307 (0.882 * Foreign moneary policy (0.584 (0.803 (0.985 (0.668 (0.4 Domesic moneary shock * Size Sizei, (0.32 (0.585 Domesic moneary shock * Liquidiy Liqi, (0.234 (0.666 Domesic moneary shock * Capialisaion Capi, (0.055 (0.042 Domesic moneary shock * Foreign ownership Fi, (0.26 (0.478 Real income growh ( Δ lny (0.860 (0.94 (0.902 (0.565 (0.929 Δ (0.004 (0.058 (0.034 (0.060 (0.026 Size i, (0.43 (0.054 Liq i, (0.00 (0.000 Cap i, (0.236 (0.058 F i, (0.99 (0.08 Price level growh ( ln P Size ( Liquidiy ( Capialisaion ( Foreign ownership ( m ~ N(0, (0.0 (0.05 (0.0 (0.03 (0.0 m2 ~ N(0, (0.99 (0.220 (0.64 (0.80 (0.098 Join Wald es ~ χ (0.000 (0.000 (0.000 (0.000 (0.000 Sargan (2 nd sep ~ χ (.000 (.000 (.000 (.000 (.000 Number of observaions Number of banks Table 4. shows he panel regression esimaes of equaion [] for oal loans o residen non-mfis boh in las and foreign currency. We presen 5 alernaive equaions: column (a conains an equaion ha includes all four bank individual characerisics (size, liquidiy, capialisaion and foreign ownership, while 9

21 columns (b o (e conain equaions wih only one characerisic. I should be noed ha from his poin on only he long run coefficiens of loan growh equaions will be discussed 2, while he shor run coefficiens are shown in Appendix. The effec of foreign moneary policy on he growh of oal loans is no saisically significan in all five equaions. Moreover, he signs of he foreign moneary policy effec vary from one specificaion o anoher. Similar resuls are obained for he average effec of a domesic moneary shock. Alhough he effec in all equaions is negaive, he impac of he domesic moneary shock is saisically significan in none of he alernaive equaions. As regards he asymmeric effec of domesic moneary shock, all coefficiens before he ineracion erms of domesic moneary shock wih bank specific variables appear o have posiive signs consisenly wih heoreical assumpions. However, he only characerisic ha appears o have saisically significan impac on bank reacion o a moneary shock is capialisaion. This resul does no depend on specificaion (he effec is saisically significan boh in column (a and (d, suggesing ha banks wih higher capialisaion on average reduce he supply of oal loans by a lesser amoun afer a domesic moneary shock. The growh of loans is also driven by macroeconomic variables, wih esimaion resuls indicaing a posiive elasiciy of he oal loan growh o price changes. Moreover, he elasiciy coefficien on price growh is very high and exceeds, varying from 2. o 3.9 in differen specificaions. I is possible however, ha such a high elasiciy of price growh comes a he cos of underesimaed elasiciy of income, as he coefficiens before real income are no saisically significan and even negaive in some columns. Moreover, we should no forge abou real esae prices, which increased much more rapidly han consumer prices and deflaors. In any case, he elasiciy of oal loans o changes in nominal income (which is he sum of real income and price changes sill exceeds and is saisically significan. 3 Obviously, such a high elasiciy can be explained by he rapid expansion of bank loans during he observed period and he increase of loan rae o GDP. The final block of explanaory variables conains individual bank characerisics. All individual characerisics have a significan effec on loan growh in columns (b o (e, wih a posiive impac for liquidiy and capialisaion, and a negaive one for size and foreign ownership. However, only liquidiy appears o have a significan effec on loan growh in he specificaion wih all 4 individual variables included. The resuls of column (a confirm ha more liquid banks repor on average a higher growh of loan porfolios. 4 In column (a, here is sill a negaive and almos saisically significan linear relaionship beween he bank size and growh rae of oal loans. One possible explanaion menioned by M. Köhler e al. (24 is ha smaller banks lend more 2 The long-erm coefficien of a variable is compued as he sum of is coefficiens (lags and curren values divided by minus he sum of he coefficiens of lags of he dependen variable. The significance of long-erm coefficiens is esed using he Wald es. 3 Elasiciy of he nominal income in column (a is 3.3 and p-value is 0.00, according o he Wald es. 4 Similar resuls were obained by oher researchers for some euro area counries. See, for example, J. Topi and J. Vilmunen (32. 20

22 aggressively o privae borrowers in order o increase heir marke share. I is ineresing ha such negaive relaionship is no unique for Lavia and has been also repored by A. Prueanu (30 for he Czech banking secor and by J. Topi and J. Vilmunen (32 for Finland. Summarising he resuls for oal loans o residen non-mfis, we can conclude ha he oal loan growh on average is no significanly affeced by a moneary shock, eiher foreign or domesic. However, here is some evidence of an asymmeric reacion of he loan supply o a domesic moneary shock, which could be an evidence of he bank lending channel in Lavia. In addiion, oal loans are driven by price changes as well as liquidiy of individual banks. Alhough we have already obained some evidence on he bank lending channel, furher invesigaion is needed o ge robus evidence on asymmeric reacion o a domesic moneary shock. I would be reasonable o disinguish beween loans issued in las and loans issued in foreign currencies, as one would expec he bank lending channel o be pronounced for loans in las bu no for loans in foreign currency. Consequenly, our nex sep is o perform a similar analysis of he growh of loans o residen non-mfis issued in las, and Table 4.2 shows he esimaion resuls of his analysis. As in Table 4., he growh of loans in las is no saisically significanly dependen on foreign ineres rae changes, alhough he coefficiens are negaive in all five specificaions. The effec of he difference beween domesic and foreign ineres raes on he growh of loans in las is negaive, wih coefficiens varying from in column (e o in column (b. A he same ime, he reacion of loan growh o he domesic moneary shock is saisically significan in column (d, and p-values are no very high in columns (a and (b. If we focus on equaion which includes all four bank specific variables, we can conclude ha an increase in he difference beween RIGIBOR 3M and EURIBOR 3M decreases quarerly growh of las loan porfolio of an average bank by 3.9 percenage poins. However, saisical significance of his resul is weak, perhaps due o he dynamic ransformaion of Lavia's banking secor and a rapid expansion of bank loans during he observed period. High volailiy of he domesic moneary shock indicaor a he beginning of he sample period (see Char 4. could be anoher reason for insignifican resuls. I is worh sressing ha he above char characerises an effec on loan porfolio of a bank wih an average size, liquidiy, capialisaion and no foreign ownership. Therefore his char does no, in any way, indicae he effec on oal loans in las, as differen banks have differen shares in he oal loan porfolio. The effec on oal loans in las could be derived only afer invesigaing he asymmeric reacion of individual banks o a domesic moneary shock. Turning o he asymmeric reacion of differen banks o a domesic moneary shock, here is a saisically significan difference depending on he level of capialisaion as in he case of oal loans. Namely, banks wih relaively higher capialisaion are less sensiive o changes in he spread beween domesic and foreign ineres raes, which could be explained by easier access o alernaive financing. This effec appears o be saisically significan boh in column (a and in column (d. In addiion, he coefficiens before he ineracion erm are higher han in Table 4.. Oher bank specific characerisics do no appear o be saisically significan, however almos all coefficiens before ineracion erms are posiive, as was 2

23 expeced heoreically. So, here is also a endency (alhough no saisically significan ha banks which are large, have higher liquidiy or are owned by foreign MFIs are less sensiiviy o a domesic moneary shock and hus also o domesic moneary policy. Table 4.2 Loans o residen non-mfis in las (long-erm coefficiens, p-values in parenheses Dependen variable: growh of loans o residen non-mfis in las ( Δ ln x i, Sample period: 998 Q Q4 (a (b (c (d (e all 4 size liquidiy capialisaion ownership Domesic moneary shock (0.23 (0.3 (0.383 (0.078 (0.45 * Foreign moneary policy (0.762 (0.959 (0.694 (0.802 (0.982 Domesic moneary shock * Size Sizei, (0.702 (0.582 Domesic moneary shock * Liquidiy Liqi, (0.447 (0.640 Domesic moneary shock * Capialisaion Cap i, (0.089 (0.050 Domesic moneary shock * Foreign ownership F, (0.48 (0.594 i Real income growh ( Δ lny (0.53 (0.76 (0.896 (0.843 (0.753 Δ (0.429 (0.500 (0.876 (0.702 (0.405 Size i, (0.562 (0.03 Liq i, (0.28 (0.058 Cap i, (0.270 (0.060 F i, (0.404 (0.45 Price level growh ( ln P Size ( Liquidiy ( Capialisaion ( Foreign ownership ( m ~ N(0, (0.036 (0.043 (0.035 (0.035 (0.04 m2 ~ N(0, (0.57 (0.082 (0.84 (0.38 (0.0 Join Wald es ~ χ (0.000 (0.002 (0.000 (0.000 (0.000 Sargan (2 nd sep ~ χ (.000 (.000 (.000 (.000 (.000 Number of observaions Number of banks The exisence of an asymmeric effec has a very imporan pracical implicaion for moneary policy in Lavia. I was shown above ha he domesic moneary shock 22

24 has a negaive effec on he growh of las loans of an average bank. However, if he larges share of domesic credi marke is occupied by banks which are large, have relaively high liquidiy or capialisaion, or are owned by non-residens, he effec of domesic moneary shock on loan growh will be reduced. Obviously, he opposie case will mean he increased imporance of he domesic moneary shock. To find ou which case is prevailing in Lavia, we calculaed he weighed average reacion of las loan growh for banks wih large, medium and small share on he domesic las loan marke. Table 4.3 shows he resuls of hese calculaions (noe ha all calculaions use 2006 daa. Table 4.3 Asymmeric impac of moneary shock on banks wih large, medium and small share in las loans marke in Lavia in 2006 (changes in quarerly growh of loans in las a a.0 percenage poin increase in spread beween RIGIBOR 3M and EURIBOR 3M Share of loans in las Reacion o p-value (% moneary shock (%. Banks wih large share Banks wih medium share Banks wih small share All banks The firs group of banks wih he highes presence in he domesic las loan marke consiss of banks ha issue more han a half of loans in las o residen non-mfis. The average reacion of hese banks o a moneary shock is even posiive, alhough no saisically significan, indicaing heir indifference o domesic moneary shocks. Relaively lower liquidiy and capialisaion of hese banks is compensaed by heir size and foreign ownership providing he access o alernaive financing. The second group of banks wih a medium share in he domesic marke consiss of banks ha issue approximaely one hird of oal loans in las. These banks are negaively and saisically significanly affeced by a domesic moneary shock (an increase of ineres rae spread by.0 percenage poin decreases he quarerly growh of loans by 7.9 percenage poins, which could be explained by lower capialisaion and liquidiy. The las group of banks wih small presence in he marke consiss of he remaining banks. These banks capure only 6% of loans in las o residen non-mfis and are negaively affeced by a moneary shock (an increase of ineres rae spread by.0 percenage poin decreases he quarerly growh of loans by 5.4 percenage poins; his effec, however, is no saisically significan. While he banks of he las group are small, higher capialisaion and liquidiy levels reduce heir sensiiviy o domesic moneary shocks. Alhough some banks have a saisically significan negaive reacion o a moneary shock, he weighed average reacion of he oal las loan growh is very small and no saisically significan mainly due o he reacion of he firs group consising of large and foreign owned banks. As a resul, we can conclude ha he domesic moneary shock and hence also Lavia's moneary policy do no have a significan effec on he growh of oal loans in las. However, a domesic moneary shock has a disribuion effec i will affec banks ha are small, domesically owned and have lower liquidiy or capialisaion. 23

25 Turning back o he resuls shown in Table 4.2, he demand effec of loans in las appears o be insignifican, alhough he elasiciy of boh he real income growh and price rises is posiive in column (a. Alhough he bank size, liquidiy and capialisaion have saisically significan linear relaionship wih he growh of loans in las in columns (b o (d, only he liquidiy variable has a weak saisical significance in column (a, implying ha more liquid banks have on average a higher growh of loans in las. Alhough some ineresing resuls have been obained for he growh of loans in las, i is worh menioning ha he loans in las represen only one-forh of oal loans o non-mfi residens; heir imporance is decreasing over ime. Therefore, i is imporan o invesigae he growh of loans o residen non-mfis issued in foreign currency, and Table 4.4 shows he esimaion resuls. According o hem, loans in foreign currency are no saisically significanly affeced by foreign moneary policy. Moreover, he effec of a domesic moneary shock is insignifican, oo. Tha is why we failed o find an empirical evidence of a subsiuion effec, alhough he heory predics he replacemen of loans in domesic currency wih loans in foreign currency under he fixed exchange regime when he ineres rae spread is changing. This can be parly deermined by he fac ha he observaion period mainly covers he ime when he las was fixed o SDR, and he exchange risk was significanly higher han afer is re-pegging o euro. Furhermore, he subsiuion effec can be clearly seen for he end of 2006 and beginning of 2007, when he srucure of loans changed in favour of loans in foreign currency due o he increasing ineres rae spread. We found ha a moneary shock is irrelevan no only for he average growh of loans in foreign currencies, bu also for individual banks, as all coefficiens before ineracion erms are saisically insignifican and here are no signs of asymmery in bank reacion o a domesic moneary shock. Loans in foreign currency are raher sensiive o changes in prices, however. Elasiciies are very high and exceed, varying from 2.4 o 4.5 depending on specificaion. Similar o Table 4., hese high elasiciies possibly come a he cos of underesimaed elasiciy of real income, as he coefficiens before real income are no saisically significan. However, he sum of wo elasiciies, indicaing elasiciy of loans o nominal income, exceeds and is saisically significan. 5 As in Table 4., he banks wih a relaively high raio of liquid asses o oal asses have a endency o increase heir loans in foreign currency more rapidly, while he large banks have lower growh of loans. We can make some inermediae conclusions a his poin. Firs, here is some evidence of a bank lending channel in Lavia, as reacion of oal loans o a domesic moneary shock is asymmeric where banks wih a relaively higher level of capialisaion are less sensiive o a domesic moneary shock (and here is some weak evidence ha he size, liquidiy and foreign ownership are also imporan for he effec of a moneary shock. 5 Elasiciy of he nominal income in column (a is 4.6 and p-value is 0.00 according o he Wald es. 24

26 Table 4.4 Loans o residen non-mfis in foreign currency (long-erm coefficiens, p-values in parenheses Dependen variable: growh of loans o residen non-mfis in foreign currency ( Δ ln x i, Sample period: 998 Q Q4 (a (b (c (d (e all 4 size liquidiy capialisaion ownership Domesic moneary shock (0.930 (0.65 (0.642 (0.364 (0.957 * Foreign moneary policy (0.496 (0.74 (0.785 (0.708 (0.5 Domesic moneary shock * Size Sizei (0.95 (0.457 Domesic moneary shock * Liquidiy Liqi, (0.346 (0.206 Domesic moneary shock * Capialisaion Cap i, (0.82 (0.627 Domesic moneary shock * Foreign ownership Fi, (0.876 (0.929 Real income growh ( Δ lny (0.956 (0.44 (0.595 (0.49 (0.52 Δ (0.00 (0.008 (0.07 (0.022 (0.006 Size i, (0.089 (0.5 Liq i, (0.002 (0.006 Cap i, (0.646 (0.2 F i, (0.65 (0.030 Price level growh ( ln P Size ( Liquidiy ( Capialisaion ( Foreign ownership ( m ~ N(0, (0.007 (0.009 (0.007 (0.008 (0.007 m2 ~ N(0, (0.304 (0.342 (0.334 (0.297 (0.259 Join Wald es ~ χ (0.000 (0.000 (0.000 (0.00 (0.000 Sargan (2 nd sep ~ χ (.000 (.000 (.000 (.000 (.000 Number of observaions Number of banks These resuls are mainly in line wih oher empirical evidence on European counries, alhough researchers usually emphasise he imporance of liquidiy level for he bank lending channel (0; 6; 25. However, here is also evidence ha banks wih differen capialisaion have differen sensiiviy o moneary policy in oher counries as well.(4; 3; 7; 9 25

27 Overall, a domesic moneary shock does no have a significan effec on he oal growh of loans in las. However, he domesic moneary shock has a disribuion effec by affecing he banks ha are small, domesically owned and have lower liquidiy or capialisaion. This asymmeric effec is pronounced for he loans issued in las, while here is no saisically significan asymmery in he reacion of loans issued in foreign currency. As a resul, we can conclude ha he bank lending channel is limied only for he supply of las loans and i dramaically reduces he significance of his channel. 4.3 Bank Loans o Households and Non-Financial Corporaions In he previous secion he focus was on oal loans in las and in foreign currency wihou a breakdown by secor. However, such breakdown could give some addiional useful informaion abou he lending channel in Lavia. As he resuls of previous analysis indicae ha he bank lending channel is acive for he supply of loans in las, we will only focus on loans in las and divide hem ino loans o households and loans o non-financial corporaions. Table 4.5 shows he resuls for he growh of loans in las o domesic households. Similar o he resuls presened in Table 4.2, he effec of foreign moneary policy on he growh of loans o households is negaive, alhough no saisically significan. The same is rue of he domesic moneary shock, which affecs loans o households negaively (excep column (a bu no saisically significanly. The asymmeric effec of a domesic moneary shock on loans o households is more pronounced however, as now wo characerisics capialisaion and liquidiy are imporan for sensiiviy of an individual bank o domesic moneary shock. This shows ha he lending channel operaes for he loans o domesic households in las. Moreover, now he imporance of liquidiy in asymmeric reacion is in line wih oher research carried ou on he European banking secors menioned above. In conras o he previous resuls, he growh of loans o households is relaed o changes in real income whose elasiciy is raher high and exceeds. The same is rue of price growh in column (a, alhough he long erm coefficien is no saisically significan. As in oher equaions, he growh of loans o households is posiively and saisically significanly affeced by liquidiy. Moreover, here are signs ha he level of bank capialisaion is imporan for he growh raes of loans o households as well. 26

28 Table 4.5 Loans o residen households in las (long-erm coefficiens, p-values in parenheses Dependen variable: growh of loans o residen households in las ( Δ ln x i, Sample period: 998 Q Q4 (a (b (c (d (e all 4 size liquidiy capialisaion ownership Domesic moneary shock (0.937 (0.607 (0.787 (0.576 (0.955 * Foreign moneary policy (0.633 (0.484 (0.93 (0.242 (0.56 Domesic moneary shock * Size Sizei, (0.604 (0.326 Domesic moneary shock * Liquidiy Liqi, (0.06 (0.067 Domesic moneary shock * Capialisaion Capi, (0.085 (0.08 Domesic moneary shock * Foreign ownership F, (0.96 (0.66 i Real income growh ( Δ lny (0.034 (0.99 (0.289 (0.285 (0.074 Δ (0.728 (0.649 (0.339 (0.832 (0.60 Size i, (0.764 (0.229 Liq i, (0.032 (0.078 Price level growh ( ln P Size ( Liquidiy ( Capialisaion ( Foreign ownership ( Cap i, (0.95 (0.077 F i, (0.407 (0.64 m ~ N(0, (0.006 (0.008 (0.006 (0.007 (0.008 m2 ~ N(0, (0.750 (0.93 (0.645 (0.924 (0.778 Join Wald es ~ χ (0.000 (0.000 (0.00 (0.023 (0.000 Sargan (2 nd sep ~ χ (.000 (.000 (.000 (.000 (.000 Number of observaions Number of banks The growh of loans in las o residen non-financial corporaions appears o be independen of ineres rae changes (see Table 4.6. Also, here are some signs of asymmeric reacion of bank loans o a domesic moneary shock, as he only coefficien before he capialisaion ineracion erm is saisically significan in column (d, and almos saisically significan in column (a. 27

29 Table 4.6 Loans o residen non-financial corporaions in las (long-erm coefficiens, p-values in parenheses Dependen variable: growh of loans o residen non-financial corporaions in las ( Δ Sample period: 998 Q Q4 (a (b (c (d (e all 4 size liquidiy capialisaion ownership Domesic moneary shock (0.844 (0.660 (0.566 (0.784 (0.465 * Foreign moneary policy (0.467 (0.380 (0.588 (0.324 (0.38 Domesic moneary shock * Size Sizei, (0.699 (0.237 Domesic moneary shock * Liquidiy Liqi, (0.822 (0.973 Domesic moneary shock * Capialisaion Capi, (0.09 (0.044 Domesic moneary shock * Foreign Δ F ownership ( MP i, ln x, (0.37 (0.78 Real income growh ( Δ lny (0.562 (0.468 (0.436 (0.552 (0.475 Δ (0.302 (0.344 (0.345 (0.285 (0.34 Size i, (0.902 (0.66 Liq i, (0.007 (0.05 Cap i, (0.450 (0.340 F i, (0.429 (0.009 Price level growh ( ln P Size ( Liquidiy ( Capialisaion ( Foreign ownership ( m ~ N(0, (0.006 (0.006 (0.007 (0.006 (0.005 m2 ~ N(0, (0.367 (0.356 (0.35 (0.357 (0.334 Join Wald es ~ χ (0.000 (0.000 (0.000 (0.000 (0.000 Sargan (2 nd sep ~ χ (.000 (.000 (.000 (.000 (.000 Number of observaions Number of banks Surprisingly, he loans o non-financial corporaions are no saisically significanly affeced by real income or price growh. Elasiciies on price changes are posiive and very high, alhough no saisically significan, while hose on real income are even negaive and no saisically significan. The only variable wih a significan effec on he growh of loans o non-financial corporaions is liquidiy, which has he usual posiive influence, and foreign ownership, which has a negaive effec (alhough i is no saisically significan in column (a. i 28

30 29 IS THERE A BANK LENDING CHANNEL OF MONETARY POLICY IN LATVIA? EVIDENCE FROM BANK LEVEL DATA These resuls confirm our previous conclusion abou he exisence of he bank lending channel for he loans issued in las. Moreover, i shows ha he bank lending channel is acive for loans o households, while here is also some evidence of asymmeric effec of a domesic moneary shock on loans o non-financial corporaions. 5. ROBUSTNESS CHECK 5. Alernaive Specificaions To perform a robusness check of he resuls presened in Secion 4, we use some alernaive specificaions of he panel regression presened in equaion []. Firs, we relax he assumpion ha he demand for loans is independen of bank specific characerisics. Second, in order o check wheher ineres raes, price and real income are sufficien o accoun for he impac of he macroeconomic environmen on loan growh, ime dummies are included insead of he abovemenioned variables. I is possible ha elasiciies of loan growh o real income and he price changes differ across banks wih various individual characerisics. In his case, we need o modify equaion [] and o include ineracions beween bank specific characerisics and demand variables (price and real income in he model: i k i k i k i k i k k k k k i i i P Z Y Z MP Z Z P Y MP MP x x,,,,, * *,, ln ln ln ln ln ln ε η δ γ λ φ ϕ β β α μ Δ Δ Δ Δ Δ Δ Δ Δ = Δ = = = = = = = = = [6]. The empirical resuls of he modified model [6] are presened in Appendix 2, Table A6.. Alhough here is some evidence of an asymmeric demand reacion (higher elasiciy o price changes for banks wih higher level of liquidiy for loans in las as well as higher elasiciy o price changes for banks wih higher level of capialisaion for loans in foreign currency, he main conclusions from Secion 4 are sill valid. Banks wih higher level of capialisaion have a lower reacion o a domesic moneary shock ha is pronounced for loans issued in las, especially for loans issued o domesic households. In addiion, Table A6. indicaes ha he level of liquidiy also drives sensiiviy of loans o changes in domesic ineres raes, as in response o a resricive moneary shock more liquid banks display a smaller diminishing of las loans. Anoher robusness check is o use dummies for every observaion period insead of moneary shocks and demand variables.(25 If he laer are sufficien, he resuls of boh models wih regard o he ineracion coefficiens should be comparable: i k i k i k k k k k i i i d MP Z Z P Y MP MP x x,,, * *,, ln ln ln ln ε γ λ φ ϕ β β α μ Δ Δ Δ Δ Δ Δ = Δ = = = = = = = [7]

31 where d denoes ime dummies. Table A6.2 in Appendix 2 shows he empirical resuls of equaion [7] wih he ime dummies wihou ineracion erms beween individual bank characerisics and demand variables, while Table A6.3 shows he model which allows for an asymmeric reacion of he loan demand. These resuls also confirm he exisence of he lending channel in Lavia, as banks wih higher capialisaion and liquidiy show weaker reacion o he domesic moneary shock boh in Table A6.2 and Table A6.3. As before, his is valid for loans issued in las o domesic households, wih some weak evidence of he exising lending channel for loans in las o non-financial corporaions. Liquidiy is also an imporan facor for he overall growh of loans (see Table A6.2. As in Secion 4, here are signs of a negaive link beween he size of a bank and he quarerly growh of loans. Finally, i should be noed ha Table A6.3 poins o some degree of asymmery in he demand for loans, his being especially pronounced in he equaion describing he growh of loans in las o domesic households. 5.2 Robusness of he Resuls for Differen Time Periods Alhough he period of our analysis is relaively shor, we should ake ino accoun ha Lavia's banking secor underwen significan changes beween 998 and Therefore, i is quie possible ha he reacion of banking loans differs a he beginning and a he end of he sample period. To check i, we esimaed he main panel regression from equaion [] for wo differen subsamples. The firs subsample covers he period from 998 o 200, whereas he second subsample sars wih he firs quarer of Table A6.4 in Appendix 2 shows he empirical resuls of he wo subsamples. The resuls for oal loans (columns (a and (b are raher similar for boh ime periods. In addiion o he imporance of capialisaion indicaed in Secion 4, he resuls in Table A6.4 sae saisically significan imporance of he bank size for sensiiviy o a domesic moneary shock. As expeced heoreically, larger banks have weaker reacion o a domesic moneary shock. The level of bank liquidiy is an imporan facor for he oal loan growh in boh equaions. There is some ime insabiliy for he growh of loans in las as well as for he growh of loans in foreign currency, however. The resuls in column (c show he exisence of he lending channel for las loans beween 998 and 200, while column (d shows no asymmeries afer Surprisingly, afer 2002 here appears an asymmeric reacion in he growh of loans in foreign currency as usual, banks wih higher capialisaion have a weaker reacion o domesic moneary shock. Finally, we check he ime sabiliy of loan growh funcions for loans in las o households and non-financial corporaions (see Table A6.5 in Appendix 2. In conras o Table A6.4 which shows no asymmeric reacion o a moneary shock for loans in las afer 2002, our esimaion indicaes he exisence of he bank lending channel in boh periods for loans in las o domesic households (moreover, he coefficien before he ineracion erm beween a moneary shock and capialisaion is higher in he second period. In addiion, here is a sign ha capialisaion was an imporan facor for he sensiiviy of loans issued o non-financial corporaions in he firs period. 30

32 CONCLUSIONS Overall, he evidence on he ime sabiliy of bank lending channel in Lavia is raher mixed; a he same ime, here are some indicaions ha in he las five-year period, compared wih , he bank lending channel was less imporan. I migh be due o Lavia's banking secor becoming sronger and healhier, wih more foreign capial inecions definiely providing addiional possibiliies of non-deposi financing and higher independence from domesic moneary shocks. However, i is worh menioning ha while he analysis of differen subsamples gives some useful informaion, hese conclusions should be aken wih grea cauion, as he number of observaions is significanly smaller han in previous esimaions. In conras o he radiional ineres rae channel, he bank lending channel focuses on a special role of banks in he moneary ransmission mechanism. The wo necessary condiions for he exisence of he bank lending channel are he abiliy of moneary policy o affec he bank loan supply and he dependency of borrowers on bank loans. The descripive evidence on he srengh of he lending channel in Lavia is mixed. Mos facors such as he marke concenraion, a high degree of non-residen ownership leading o significan level of liabiliies o non-residen MFIs, he low share of las loans, good qualiy of he loan porfolio and high profiabiliy indicae ha he lending channel should be weak. On he oher hand, he high degree of bank dependency of he local borrowers, lile governmen presence as well as decreased liquidiy and capial raios speak in favour of he presence of lending channel. For empirical invesigaion of he bank lending channel in Lavia we use he approach ha builds on he sandard panel regression. The evidence on he bank lending channel is obained by esimaing a bank loan funcion ha akes ino accoun no only he moneary policy indicaor and macroeconomic variables, bu also bank-specific differences in he lending reacion o moneary policy acions. The main quesion is wheher here are cerain ypes of banks ha show a relaively srong decrease in lending afer moneary ighening. The resuls for oal loans o residen non-mfis in las indicae ha here is some evidence of asymmeric reacion of he loan supply o a domesic moneary shock, which could be an evidence of bank lending channel in Lavia. The las loan porfolios of he banks wih higher capialisaion are less sensiive o changes in he spread beween he domesic and foreign ineres raes, which could be explained by easier access o alernaive financing. There is also a endency, alhough no saisically significan, ha banks which are larger or have relaively higher liquidiy, or are owned by foreign MFIs have weaker sensiiviy o a domesic moneary shock. Moreover, he bank lending channel is operaing for loans in las o households, while here is almos no evidence of an asymmeric effec of a domesic moneary shock on loans o non-financial corporaions. A he same ime, here is no saisically significan asymmery in he reacion of loans graned in foreign currency. These resuls are robus, as he asymmeric reacion o a moneary shock remains significan under differen specificaions of he panel regression. Moreover, no only capialisaion, bu also liquidiy and size appear o have a significan impac on bank 3

33 sensiiviy o domesic ineres rae in some specificaions. The evidence on he ime sabiliy of he bank lending channel in Lavia is raher mixed, and here are some indicaions ha compared wih he bank lending channel has been less imporan in he las five-year period. I migh be due o Lavia's banking secor becoming sronger and healhier, wih more foreign capial inecions definiely providing addiional opporuniies for non-deposi financing and higher independence from domesic moneary shocks. Our analysis shows ha alhough some banks in Lavia have a saisically significan negaive reacion o a domesic moneary shock, he weighed average reacion of he oal las loan growh is no saisically significan mainly due o he reacion of he dominaing banks. A domesic moneary shock has only a disribuion effec and affecs banks ha are small, domesically owned and have lower liquidiy or capialisaion. As his asymmeric effec is no pronounced for loans issued in foreign currency, we can conclude ha he bank lending channel is limied only o he supply of las loans, which dramaically reduces he imporance of his channel. Therefore, alhough here is evidence ha he Bank of Lavia's moneary policy can influence he las loan supply of some banks, ransmission hrough he lending channel sops here, as here is no significan effec on oal loans and real economy. 32

34 APPENDICES Appendix. Shor-erm coefficiens of panel regressions Table A Loans o residen non-mfis in las and foreign currency Dependen variable: growh of loans o residen non-mfis in las and foreign currency ( Δ ln x i, Sample period: 998 Q Q4 Lags Coefficien Sd. error -value p-value Growh of loans ( Δ ln x i, Domesic moneary shock * Foreign moneary policy Domesic moneary shock * Size Sizei, Domesic moneary shock * Liquidiy Liqi, Domesic moneary shock * Capialisaion Capi, Domesic moneary shock * Foreign ownership Fi, Real income growh ( Δ lny Price level growh ( Δ ln P Size ( Size, i Liquidiy ( i Capialisaion ( i Foreign ownership ( Liq, Cap, F, i 33

35 Table A2 Loans o residen non-mfis in las Dependen variable: growh of loans o residen non-mfis in las ( Δ ln x i, Sample period: 998 Q Q4 Lags Coefficien Sd. error -value p-value Growh of loans ( Δ ln x i, Domesic moneary shock * Foreign moneary policy Domesic moneary shock * Size Sizei, Domesic moneary shock * Liquidiy Liqi, Domesic moneary shock * Capialisaion Capi, Domesic moneary shock * Foreign ownership Fi, Real income growh ( Δ lny Price level growh ( Δ ln P Size ( Size, i Liquidiy ( i Capialisaion ( i Foreign ownership ( Liq, Cap, F, i 34

36 Table A3 Loans o residen non-mfis in foreign currency Dependen variable: growh of loans o residen non-mfis in foreign currency ( Δ ln x i, Sample period: 998 Q Q4 Lags Coefficien Sd. error -value p-value Growh of loans ( Δ ln x i, Domesic moneary shock * Foreign moneary policy Domesic moneary shock * Size Sizei, Domesic moneary shock * Liquidiy Liqi, Domesic moneary shock * Capialisaion Capi, Domesic moneary shock * Foreign ownership Fi, Real income growh ( Δ lny Price level growh ( Δ ln P Size ( Size, i Liquidiy ( i Capialisaion ( i Foreign ownership ( Liq, Cap, F, i 35

37 Table A4 Loans o residen households in las Dependen variable: growh of loans o residen households in las ( Δ ln x i, Sample period: 998 Q Q4 Lags Coefficien Sd. error -value p-value Growh of loans ( Δ ln x i, Domesic moneary shock * Foreign moneary policy Domesic moneary shock * Size ( Δ Size MP i, Domesic moneary shock * Liquidiy Liqi, Domesic moneary shock * Capialisaion Capi, Domesic moneary shock * Foreign ownership Fi, Real income growh ( lny Δ Δ Size, Price level growh ( ln P Size ( i Liquidiy ( i Capialisaion ( i Foreign ownership ( Liq, Cap, F, i 36

38 Table A5 Loans o residen non-financial corporaions in las Dependen variable: growh of loans o residen non-financial corporaions in las ( Δ ln x i, Sample period: 998 Q Q4 Lags Coefficien Sd. error -value p-value Growh of loans ( Δ ln x i, Domesic moneary shock * Foreign moneary policy Domesic moneary shock * Size Sizei, Domesic moneary shock * Liquidiy Liqi, Domesic moneary shock * Capialisaion Capi, Domesic moneary shock * Foreign ownership Fi, Real income growh ( Δ lny Δ Size, Price level growh ( ln P Size ( i Liquidiy ( i Capialisaion ( i Foreign ownership ( Liq, Cap, F, i 37

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