Monetary policy and bank lending in a low interest rate environment: diminishing effectiveness?

BIS Working Papers No 612
February 2017

Published in: Journal of Macroeconomics, forthcoming.

This paper analyses the effectiveness of monetary policy on bank lending in a low interest rate environment. Based on a sample of 108 large international banks, our empirical analysis suggests that reductions in short-term interest rates are less effective in stimulating bank lending growth when rates reach a very low level. This result holds after controlling for business and financial cycle conditions and different bank-specific characteristics such as liquidity, capitalisation, funding costs, bank risk and income diversification. We find that the impact of low rates on the profitability of banks' traditional intermediation activity helps explain the subdued evolution of lending in the period 2010-14.

JEL classification: E44, E51, E52

Keywords: Bank lending, monetary transmission mechanisms, low interest rate environment