The transmission of monetary policy via the banks’ balance sheet – does bank size matter?

29 January 2021
Publication Type: Working Paper
JEL Code: E32, E52, F18, G21, O13, O14, O33, Q01, Q54, Q56

We study the credit channel of monetary policy in South Africa between 2002 and 2019 using banks’ balance sheets. We show that there is a significant heterogeneity within the banking sector in both the loan and deposit sides of the banks’ balance sheets. In response to a contractionary monetary policy shock, big banks adjust their loan portfolio by lending to businesses and reducing lending to households whereas for small banks we find the opposite. The increase in corporate lending amid declining inventories is consistent with the hypothesis of “hedging and safeguarding the capital adequacy ratio” rather than funding business inventories. This paper highlights the importance of heterogeneity in customers, market power and business models in the banking sector, which characterises the socio-demographics dynamics in South Africa.

Working paper 849
1 January 2021