Banking Competition and the Lending Channel: Evidence from Bank-Level Data in Asia and Latin America

Abstract

This paper examines how banking competition affects the transmission of monetary policy through the bank lending channel. Using bank-level panel data for commercial banks in ten Asian countries and ten Latin American countries during the period from 1996 to 2006, we apply a two-stage estimation procedure. In the first stage, we measure the degree of banking competition by applying the methodology proposed by Panzar and Rosse (1987). The results show that banking markets in Latin America and Asia are characterized by monopolistic competition, and overall, banking competition in Latin America is higher than in Asia. In the second stage regression analysis, we estimate a loan growth equation where the explanatory variables include the Panzar-Rosse measure of banking competition. The estimation results provide consistent evidence that increased competition in the banking sector weakens the transmission of monetary policy through the bank lending channel. This is especially so for banks in Latin American countries and banks with small size, low liquidity, and low capitalization. We also discuss the policy implications of the main findings of this paper.