Heterogeneous Bank Lending Responses to Monetary Policy: New Evidence from a Real-time Identification

Heterogeneity in bank responses to monetary policy is consistent with an aggregate lending channel. However, estimates of bank responses are typically obtained using realized federal funds rate changes, which are endogenous to expected, macroeconomic fundamentals. As such, estimated heterogeneity can arise from expected fundamentals. Using an exogenous policy measure identified from narratives on FOMC intentions and real-time forecasts, we find greater heterogeneity in responses. There is a much stronger monetary policy transmission to smaller banks. The shielding of lending amongst holding companies is larger using the exogenous measure. Unlike previous research, we find that holdings of securities amplify exogenous policy transmission, while equity capital negates it. The results highlight the importance of controlling for policy endogeneity in future studies of bank lending behavior.