THE IMPORTANCE OF THE BANK-LENDING CHANNEL IN ESTONIA: EVIDENCE FROM MICRO-ECONOMIC DATA Reimo Juks December 2004 Working Papers of Eesti Pank No 6, 2004

The paper studies the importance of the bank-lending channel in Estonia. The results from the descriptive evidence suggest that there is a significant share of bank dependent borrowers in Estonia, but the impact of a monetary policy shock on the loan supply of banks seems to be ambiguous. The empirical analysis provides evidence in favour of the bank-lending channel in Estonia. First, well-capitalized banks seem to experience a smaller outflow of deposits after a monetary contraction. Second, the liquidity position of banks seems to be an important determinant of the loan supply suggesting that more liquid banks are able to maintain their loan portfolios, while less liquid banks must reduce their loan supply after a monetary policy contraction. This finding is consistent with the evidence for the euro area, where liquidity is also the most important determinant of the loan supply.
JEL Codes: E52, G21, G32, C33
Key words: bank lending channel; monetary policy transmission

Authors' e-mail address: reimo.juks@hhs.se

The views expressed are those of the author and do not necessarily represent the official views of the Bank.

Contents

Introduction

1. The role of the bank-lending channel in monetary policy transmission mechanisms

1.1. The concept of the bank-lending channel

1.2. The determinants of the bank-lending channel

2. Descriptive evidence on the bank-lending channel in Estonia

2.1. The structure of the financial sector

2.2. The importance of bank credit in private sector financing

2.3 The structure and strength of the banking sector

3. Econometric evidence of the importance of the bank-lending channel in Estonia

3.1. Identification

3.2. Model specification and estimation strategy

3.3. Data description

3.4. Estimation results

Conclusions

Appendix. Data description

References

The Importance of the Bank-Lending Channel in Estonia: Evidence from Micro-Economic Data, Working Papers of Eesti Pank No 6, 2004 (PDF*)

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