Is There a Bank Lending Channel of Monetary Policy in Latvia? Evidence from Bank Level Data

2 Introduction 3 1. The Bank Lending Channel 4 1.1 Interest Rate and Credit Channels: a Brief Overview of Theoretical Concepts 4 1.2 Determinants of the Bank Lending Channel 6 2. A Short Description of Latvia's Banking Sector 7 2.1 Importance of the Banking Sector for Latvia's Financial System 7 2.2 Structure of Latvia's Banking Sector 8 3. Discovering Asymmetries in Bank Lending Behaviour 12 3.1 A Brief Overview of Previous Empirical Studies 12 3.2 Panel Approach to Identifying Asymmetries in Bank Lending 13 3.3 Estimation Method 16 4. Bank Lending Channel in Latvia: Econometric Estimations and Results 17 4.1 Data Issues 17 4.2 Bank Loans to Residents 18 4.3 Bank Loans to Households and Non-Financial Corporations 26 5. Robustness Check 29 5.1 Alternative Specifications 29 5.2 Robustness of the Results for Different Time Periods 30 Conclusion 31 Appendices 33 Bibliography 43 ABBREVIATIONS CPI – Consumer Price Index CSB – Central Statistical Bureau of Latvia ECB – European Central Bank EURIBOR 3M – Euro Interbank Offered Rate, the index of European interbank euro credit interest rates for credits with a 3-month maturity FCMC – Financial and Capital Market Commission GDP – Gross Domestic Product GMM – Generalised Method of Moments HHI – Herfindhal-Hirschman Index LCD – Latvian Central Depository LIBOR SDR 3M – the index of SDR interest rates for credits with a 3-month maturity, calculated using London Interbank Offered Rate Indices MFI – monetary financial institution. Credit institutions and other financial corporations whose business is to receive deposits and/or close substitutes for deposits from entities other than MFIs and to grant credit and/or make investment in securities for their own account, as well as national central banks. RIGIBOR 3M – Riga Interbank Offered Rate, the index of Latvian interbank lats credit interest rates for credits with a 3-month maturity SDR – Special Drawing Rights