The bank lending channel of monetary policy transmission in South Africa

Abstract

This paper studies the bank lending channel of monetary policy in South Africa. We measure credit supply with homeloan data from banks and nonbanks and we use monetary shocks via high-frequency asset price reactions to policy announcements in a proxy-SVAR model. We find that the bank lending channel is operative, as banks reduce the supply of homeloans after monetary tightening, negatively impacting the housing market. In addition, we show that the deposit channel underpins the bank lending channel’s effectiveness. After a monetary tightening, banks widen the deposits spread and the volume of deposits shrinks, as expected. Since retail deposits are vital stable funding for banks, this mechanism drives the lending channel.