Bank Capital, Bank Lending and Monetary Policy in the United States

This paper examines the relationship between banks lending and monetary policy for banks with different level of capital ratio. We study the relation using the sample of U.S. banks over the period 1994 to 2010. We choose short term interest rate, deposit, security and GDP as components of monetary policy. We use bank loan change as the dependent variable, short term interest rate, deposit, security, GDP change and 1 year lagged change as independent variables for the regression model. Our model returns significant results for all independent variables except security change lagged variable for all three categories and short term interest rate variable for best-capitalized banks. Out finding shows that the monetary policy change will significantly affect bank lending change with strongest effect on least-capitalized banks and weakest effect on best-capitalized banks.