Abstract:
The changes in monetary policy affects the channel of bank lending directly as by the change of interest rate banks are given the signal of lowering the flow of loanable funds to the prospective borrowers if the interest rate is set higher by the policy makers. Some recent studies have confirmed that in the economy where banks are competitive with each other, the lending channel has comparatively minor adversity by the interest rate change.
The primary objective of this study is to find out the effect of the change of monetary policy on banks when they are competitive among themselves. To obtain this objective, the measures of bank competition would be calculated and then they would be tested via empirical model to find out the effect interest rate change on banks when they are in a competitive situation. Finally, there will be comparative analysis between Western and Eastern regions‟ banks.
In this study, 10 countries were selected, a mix of developed and developing, to see whether the banks are competitive or monopolistic and finally how the demand for loanable funds gets affected by the monetary policy change. To measure the competition Panzar- Rosse H statistics were calculated and the bank level data are collected from Bankscope. To analyze the impression of competition on bank lending channel the empirical model of Ehrmann et at (2003) was adopted, which is been followed by many other studies as well. As the data covered the global financial crisis era, to check whether the banks‟ competition could have the same impact on bank loan supply through and afterwards the catastrophe, the samples were divided into two groups – during and after the crisis, and the model was tested again.
Interestingly the countries where there is monopolistic competition show less sensitivity compared to those which have no competition among themselves for interest rate change. It was observed that, during global financial crisis, bank competition cannot perform strongly to x | P age
xi | P a g e
combat the policy rate changes by ensuring their loanable funds‟ demand to be fulfilled smoothly and banks of eastern region needed more time to heal even after the crisis period.
The study overall proves that the monetary transmission mechanism gets weaker when the banks are competitive in a country and suggests the policy makers to come up with some alternatives to preserve the true intention of Monetary Policy Change.
