Impact of Monetary Policy on Bank Lending: Does Market Structure Matter?

This study investigated the role of various factors in the bank lending channel of monetary policy transmission. Using annual data (2000-2012) from the Chinese banking industry, the result of this study suggest that bank lending channel neither operates through balance sheet characteristics nor through bank risk. However, this study provides significant evidence of the lending channel operates through the market structure. The market power undermines the effect of monetary policy on bank lending. The results have important policy implications for the Chinese banking industry. Although higher competition raises concerns about financial stability, however, in this case, higher market power has a detrimental effect on bank lending channel and monetary policy transmission. Such results may argue pro-competitive policy in the Chinese banking market so that the desired objective of monetary policy can be achieved.