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Banks’ lending behavior and monetary policy: evidence from Sweden

Review of Quantitative Finance and Accounting volume 38, pages 131–148 (2012)Cite this article

Abstract

The main purpose of this paper is to investigate the aggregate data about bank loans which may hide significant information about the monetary transmission mechanism. This study, by disaggregating bank loans data and using the relevant interest rates in Sweden, investigates the behaviour of banks after a monetary policy tightening. By using an unrestricted VAR model and impulse response analysis, our results show that a shock on the policy rate affects the main components of the banks’ loan portfolios differently. Initially, banks do not reduce lending to firms and households and they present a sluggish reaction concerning the relevant interest rates. On the contrary, they reduce lending to mortgage credit institutions significantly since real estate lending can be considered as a risky long-term investment. Moreover mortgage credit institutions reduce lending for housing purposes to non-bank public. This reduction is mainly driven by flexible rate loans and loans secured on tenant owned apartments. Consequently, theses actions have a significant effect on real economic activity, by amplifying the initial shock from the tightening monetary policy. The latter result provides evidence of the bank lending channel in Sweden working via mortgage lending and could be very important for policy makers.

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Notes

  1. In March 1993 Sweden changed to inflation targeting, but according to Sveriges Riskbank the system was not established and operational until the end of 1995.

  2. The augmented Dickey–Fuller and Phillips–Perron tests have been applied. Moreover, the Elliott et al. (1996) test and the modified Z tests of Perron and Ng (1996) have been applied because they have superior power and size properties compared with the first two.

  3. Cointegration tests based on the Johansen procedure are not presented for economy of space.

  4. The optimal lag length is one under Schwarz and Hannan-Quinn information criteria.

  5. Diagnostic tests (the Jarque–Bera test for normality, F-statistic versions of the Breusch–Godfrey test for autocorrelation and the ARCH test) on residuals from estimation of Eq. 5 do not indicate any problem concerning autocorrelation, heteroskedasticity and normality issues.

  6. We would like to thank one of the anonymous referees for his helpful comment of introducing any regulatory changes during the sample period.

  7. It is interesting to mention at that point that the causes of the Swedish financial crisis in 1990s were similar to those of the recent sub-prime loan crisis in USA.

  8. Swedbank, Handelsbanken, Nordea and SEB.

  9. This result not presented for economy of space, is confirmed empirically by looking impulse response of foreign non bank public deposits, to a random interest rate shock.

  10. Normally mortgage institutions only offers first mortgage, i.e. a loan pledged up to around 80 per cent of the market value of the property. The second mortgage, i.e. a loan pledged above the first mortgage up to around 90–100 per cent of the market value, is normally only offered by banks.

  11. Sweden with Germany, Denmark and UK present the highest ratios compared to the rest of Europe. (Source: Eurostat).

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Authors and Affiliations

  1. Department of Economics, University of Thessaly, Korai 43, Post Code 38333, Volos, Greece

    Stephanos Papadamou

  2. Department of Business Administration, University of Patras, Patra, Greece

    Costas Siriopoulos

Authors
  1. Stephanos Papadamou
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  2. Costas Siriopoulos
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Correspondence to Stephanos Papadamou.

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Papadamou, S., Siriopoulos, C. Banks’ lending behavior and monetary policy: evidence from Sweden. Rev Quant Finan Acc 38, 131–148 (2012). https://doi.org/10.1007/s11156-010-0222-z

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Keywords

  • Monetary policy and interest rates
  • Transmission mechanism
  • VAR models
  • Banks

JEL Classification

  • E40
  • E52
  • G21

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