Bank Market Power and Monetary Policy Transmission
by Sophocles N. Brissimisa, b, Manthos D. Delisc and Maria Iosifidic
This paper examines empirically the role of bank market
power as an internal factor influencing banks’ reaction in terms
of lending and risk taking to monetary policy impulses. The
analysis is carried out for the U.S. and euro-area banking sectors
over the period 1997–2010. Market power is estimated
at the bank-year level, using a method that allows the efficient
estimation of marginal cost of banks also at the bank-year level.
The findings show that banks with even moderate levels of
market power are able to buffer the negative impact of a monetary
policy change on bank loans and credit risk. This effect
is somewhat more pronounced in the euro area compared with
the United States. However, following the sub-prime mortgage
crisis of 2007, the level of market power needed to shield bank
loans and credit risk from the impact of a change in monetary
policy increased substantially. This is clear evidence that the
financial crisis reinforced the mechanisms of the bank lending
and the risk-taking channels.
JEL Codes: E44, E52, G21, C14.
Full article (PDF, 41 pages, 411 kb)
a Bank of Greece
b University of Piraeus
c Surrey Business School, University of Surrey