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: In an effort to shed new light on the monetary transmission mechanism, we create a panel data set that includes quarterly observations of every insured commercial bank in the U.S. over the period 1976-1993. Our key finding is that the impact of monetary policy on lending behavior is stronger for banks with less liquid balance sheets--i.e., banks with lower ratios of securities to assets. Moreover, this pattern is largely attributable to the smaller banks, those in the bottom 95% of the size distribution. These results provide support for the existence of a "bank lending channel" of monetary transmission. * This paper is a revision of our June 1997 NBER working paper entitled "What Do A Million Banks Have to Say About the Transmission of Monetary Policy?". Research support was provided by the National Science Foundation and the Finance Research Center at MIT. We are grateful for the generous assistance of the Federal Reserve Bank of Chicago, particularly Nancy Andrews and Pete Schne...

This article reviews some recent work, which suggests that monetary policy has significant distributional effects that operate through the banking system. We briefly discuss how this bank transmission channel may operate in the EMU. First, we describe the conceptual differences between the bank-centric view of monetary transmission and the conventional view, in which banks do not play a key role. The bankcentric theory hinges on two key propositions: that monetary interventions do something special to banks; and that once banks are affected, so are firms and/or consumers. Then we review the empirical evidence, which tends to support the bank-centric view. Finally, we look at how a common monetary policy will affect banks throughout Europe and how this, in turn, might influence real economic activity in different countries. A byproduct of our work is that we have developed a large amount of documentation and experience working with U.S. bank-level data, which we describe in the appendix at the end of this article. The appendix also provides details of how researchers can access these data via the Federal Reserve Bank of Chicago's Web site

Conference for helpful comments and suggestions. The analysis expressed herein does not necessarily reflect the views of the Federal Reserve Bank of New York or the Federal Reserve We use a large matched sample of individual loans, borrowers, and banks to investigate whether bank financial health affects terms of lending, holding constant proxies for borrower risk and information costs. In particular, we focus on measuring effects of borrower and bank characteristics on loan interest rates; we also investigate implications of borrower and bank characteristics for indirect measures of credit availability. Our principal findings are six. First, even after controlling for borrower risk and information costs, the cost of borrowing from low-capital banks is higher than the cost of borrowing from well-capitalized banks. Second, this cost difference is traceable to borrowers for which information costs and incentive problems are a priori important. Third, weak bank effects on the cost of funds are higher in periods of rising interest rates. Fourth, estimated weak bank effects remain even after controlling for unobserved heterogeneity in the matching of borrowers and banks. Fifth, weak bank effects are quantitatively important only for high-information-cost

Kashyap, Nelson Mark, Alan Viard and the participants at the conference for comments and suggestions. I am grateful to the National Science Foundation and the Federal Reserve Traditional studies of monetary policy's impact on the real economy have focused on its aggregate e®ects. Beginning with Friedman and Schwartz (1963), modern empirical research in monetary economics emphasizes the ability of policy to stabilize the macroeconomy. But causal observation suggests that business cycles have distributional

In the last twenty years, countries throughout the world have experienced severe bouts of financial instability. Banking crises have become so common that it is the rare country that has not experienced one, while full-scale financial crises have struck some economies with devastating effects. Financial instability, although a particularly severe problem for emerging-market countries which suffer disproportionately when it occurs, has struck industrialized countries just as frequently. Given our recent record of increased financial instability, it is no surprise that policymakers throughout the world, and especially central bankers, have become more concerned about what leads to financial instability and what can be done to prevent it. This paper examines what causes and propagates financial instability and then suggests some lessons for policymakers. A key theme of the analysis is that the root cause of financial instability is the breakdown

This essay surveys the body of research that asks how the efficiency of corporate investment is influenced by problems of asymmetric information and agency. I organize the material around two basic questions. First, does the external capital market channel the right amount of money to each firm? That is, does the market get across-firm allocations right, so that the marginal return to investment in firm i is the same as the marginal return to investment in firm j? Second, do internal capital markets channel the right amount of money to individual projects within firms? That is, does the internal capital budgeting process get withinfirm allocations right, so that the marginal return to investment in firm i’s division A is the same as the marginal return to investment in firm i’s division B? In addition to discussing the theoretical and empirical work that bears most directly on these questions, the essay also briefly sketches some of the implications of this work for broader issues in both macroeconomics and the theory of the firm.

Affiliation with a multi-bank holding company gives a subsidiary bank better access to external funds than otherwise similar stand-alone banks, implying that affilated banks are largely able to shield lending from a monetary contraction while stand-alone banks are forced to slow loan growth and draw down on liquid assets. In state banking markets where where stand-alone banks have more market share, the response of aggregate lending to monetary policy is stronger. On the other hand, there is little difference in the response of state output across the market share of affiliated banks, implying that the aggregate elasticity of output to bank lending is very small, if not zero. I conclude that while small firms might view bank loans as special, bank loans are not special enough for the lending channel to be an important part of how monetary

Recently, several central banks have lost their bank supervisory responsibilities, in part because it has not been shown that supervisory authority improves the conduct of monetary policy. This paper finds that confidential bank supervisory information could help the Board staff more accurately forecast important macroeconomic variables and is used by FOMC members to guide monetary policy. These findings suggest that the complementarity between supervisory responsibilities and monetary policy should be an important consideration when evaluating the structure of the central bank.

Tightening monetary policy excessively as an initial response to the East Asian crisis has been frequently criticized, albeit without empirical support. In this paper, we examine the extent that monetary/financial shocks are magnified in the Korean economy via the credit channel. We find that spreads, which capture credit channel effects, do indeed influence economic activity, and these effects are disproportionately larger for small and medium-sized enterprises. Consequently, policy makers who neglect credit channel effects might be “overkilling the economy ” and altogether overlooking the incommensurate sectoral effects of monetary/financial shocks. ______________________________________________________________________________ * Ilker Domaç and Giovanni Ferri are economist and principal financial economist in the East Asia Pacific Region, respectively. The findings and conclusions of the paper are those of the authors. They do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. Summary The debates surrounding the recent East Asian crises have focused, not only on