The role of banks in transmission of monetary policy in an economy has been a subject of theoretical and empirical investigations. This study attempts to empirically investigate the role played by private commercial banks in South Africa in transmitting the impulses of monetary policy shocks to the rest of the economy. Focus is placed on the bank lending channel of monetary transmission due to the importance of banks in the financial system. Specifically, we examine whether the central bank’s monetary policy stance affects banks’ lending behaviour. We specify and test the bank lending channel of monetary policy transmission in South Africa by using a panel structural approach that distinguishes banks according to size. The results indicate the prevalence of the bank lending channel in which banks play a pivotal role in the monetary policy transmission in South Africa. Also bank size had proved to appropriately discriminate banks in South Africa according to their external finance cost.
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