The Impact of Monetary Policy and Macro-prudential Policy on Banks Lending Conditions: Evidence from the Asian Region

Abstract

Since the economic expansion began in 2002, lowering monetary policy rates has been one of the policies to boost economic growth. Until the 2008 global financial crisis, the question of how monetary policy affects banks stability has been a main issue in academic and policy field. Some of scholars criticized that the low monetary policy rate is culprit of 2008 global financial crisis. They deemed that keeping monetary policy rate too low can increase banks lending and risk-taking by financial institutions. The main research of this paper is to examine two specific questions related to transmission mechanism of monetary policy in Asian region during 2005-2012. First, whether monetary policy affects banking stability by analyzing its impact on commercial banks lending in Asian region? Second, if monetary policy affects banks lending, whether macro-prudential policy could affect the impact of monetary policy rate on commercial banks lending. The paper found that monetary policy which is short term interest rate reversely affects commercial banks lending condition in Asian region. The macro-prudential policy reversely impacts the commercial banks lending condition. The paper also found that monetary policy and macro-prudential policy are connected and influenced each other. Therefore, few suggestions could be proposed in this paper. First, the results of this paper suggest that central banks would need to consider the possibility of bank risk by making monetary policy rate too low. Furthermore, the potential impact of risk-taking by banks also may have implications for longer term macroeconomic outlook including output growth, investment and credit. Second, banking supervisors should strengthened the macro-prudential perspective to financial stability by intensifying their vigilance during periods of protracted low interest rates, particularly if accompanied by other signs of risk-taking, such as rapid credit and asset price increases. Finally, the authorities of central bank should pay more attention to financial stability issues when they conduct monetary policy. The results of this paper supports that central banks should take more responsibilities on macro-prudential supervision and regulation, in particular the new responsibilities of the Asian regions central bank on macro-prudential policy to monitor systemic risk.