The cross-border credit channel and lending standards surveys

Summary

Focus

Banks, especially global ones, play critical roles in the transmission of monetary policies domestically and internationally. This was particularly true during the global financial crisis. This paper looks at how the adoption of unconventional monetary policies in the United States and the euro area influenced bankers' attitudes toward lending, and the implications for the international transmission of monetary policy.

Contribution

This paper pulls together a set of underused surveys of bankers' attitudes about lending conditions - surveys conducted with Senior Loan Officers from 16 countries - to offer new insights into the monetary transmission mechanism. We document the link between changing bank lending standards and changing domestic credit conditions. We show how changing lending attitudes in the major advanced economies led to spillovers of financial conditions to other advanced and emerging market economies.

Findings

Unconventional monetary policies resulted in a welcome lowering of bank lending standards and an increase in the supply of credit. This helped amplify the initial impacts of the central bank stimulus both at home and abroad. However, we also find evidence of a stigma effect. Resorting to unconventional monetary policies signalled a deterioration in economic prospects, which contributed to a decline in credit demand. This in turn sapped the policies' overall effectiveness. The experiences in the United States and euro area underscore the importance of effective central bank communication.

Abstract

This paper argues that a measure of lending conditions - Senior Loan Officer (SLO) surveys - offers important insights into the monetary transmission mechanism. Using a Global VAR (GVAR) and SLO survey data from 16 countries, we document bank lending standards' significant role in explaining the dynamics of domestic credit conditions. Changes in lending attitudes lead to spillovers of financial conditions to other advanced and emerging market economies. We also examine the interaction of unconventional monetary policies (UMPs) and lending attitudes by using an external high frequency instrument. Looking through this lens of UMPs, we see that expansionary monetary policy led to a lowering of domestic credit standards which amplified the impact of the initial monetary stimulus. However, we also find evidence that the need to resort to UMPs also brought about a decline in lending demand, raising questions about whether the signaling channel of monetary policy unintentionally worked at cross purposes by sapping the full effectiveness of these policies. The varied experiences in the United States and euro area draw attention to the relative importance of bank intermediation in determining the strength of the bank lending channel of monetary policy.

JEL classification: F44, F36, F15, E5, E32

Keywords: global VAR, lending standards and credit conditions, unconventional monetary policies, spillovers