Competition and the Bank Lending Channel in Eurozone

Aurelien Leroy , University of Orleans examines Competition and the Bank Lending Channel in Eurozone.

ABSTRACT: This paper examines how banks respond to the monetary policy of the European Central Bank (ECB) according to their characteristics and, in particular, to their market power, using banking micro-data from Eurozone countries over the period from 1999 to 2011. Our results suggest that banks with market power, which is proxied by the Lerner index, have a credit supply that is less sensitive to monetary policy shock. The market structures (aggregated measures) in which the banks operate have a similar effect. Therefore, increased competition enhances the effectiveness of monetary policy transmission through the bank lending channel. We find also over the period from 2008 to 2011, that this channel has been strengthened, but the negative effect of market power on monetary effectiveness has remained.