The Bank Lending Channel Revisited


  • I would like to thank Claudio Borio, Leonardo Gambacorta, Goetz von Peter, and Nikola Tarashev for comments and helpful discussions. The paper also benefited from comments by seminar participants at the Bank for International Settlements. All remaining errors are mine. The views expressed in this paper are those of the author and do not necessarily represent those of the Bank of Thailand.


A central proposition in research on the role of banks in the transmission mechanism is that monetary policy imparts a direct impact on deposits and that deposits act as the driving force of bank lending. This paper argues that the emphasis on policy-induced changes in deposits is misplaced. A reformulation of the bank lending channel is proposed that works primarily through the impact of monetary policy on banks’ balance sheet strength and risk perception. Such a recasting implies, contrary to conventional wisdom, that greater reliance on market-based funding enhances the importance of the channel.