Heterogenous impact of monetary policy on the Philippine rural banking system

Abstract

This paper shows the differential impact of monetary policy on the lending behavior of rural banks, with the bank lending channel being operational in small rural banks. While big rural banks are able to protect their lending portfolio from contractionary monetary policy by the size of their balance sheet, small rural banks with less diversified funding portfolio cannot. Moreover, highly capitalized rural banks are more inclined to protect their capital than expand their lending portfolio, following monetary tightening and higher capital requirement. The insignificance of gross domestic product (GDP) growth may reflect weakness in effective loan demand and lack of diversification that could have also impinged on the earning capacity of rural banks, as supported by initial estimates on the drivers of rural bank profitability. The finding on heterogeneous effects of monetary policy on rural banks has a secondary implication of lending credence to the principle of proportionality embodied in the BSP’s bank regulatory framework.