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