The Effects of Local Banking Market Structure on the Bank-Lending Channel of Monetary Policy

Examines the impact of monetary policy on thebanking industry, and in turn private-sector borrowing, specifically by smallbusinesses. Changes in monetary policy may impact bank lending through theirimpacts on a bank's costs, and this impactmay vary in relationtothe degree of banking competition in a particular market. The studyanalyzes 1996-2002 loan data collected as part of theCommunityReinvestment Act (CRA) program, which provides the number of business loansmade and their dollar values. Results indicate that as market concentration increases, the volatility inoutstanding securities and loans decreases, which implies that increased marketconcentration in the banking industryleads to less reaction by banks tooutside stimuli.In comparing rural markets to urban markets, the analysisshows that that there is a bank-lending channel effect in rural markets,whereas the urban markets exhibit weaker results.Implications that thisresearch may have on the Federal Reserve's policies are explored.(SRD)