The bank lending channel of monetary policy: identification and estimation using Portuguese micro bank data



section dimension of the data also plays an important role in establishing the properties of
the estimators. Also, for the cointegration approach to be valid the ultimately decisive
criterion is always the outcome of the cointegration tests. As it will be pointed out below,
the null of non-cointegration is always strongly rejected in our estimated equations and
this clearly legitimates our approach.

As explained in section 5 we directly estimate loan-supply functions, which are
generalisations of (3.4) and (4.1). However an important point regarding these equations is
now in order. The basic loan-supply specification estimated in this section includes bank
capital as an additional regressor. We may justify the introduction of such regressor on
two different grounds. In econometric terms, one can argue that if it is not included, then
deposits would be the single variable capturing “scale” effects in our supply function and
the results would likely be biased towards favouring the conclusion of the existence of the
credit channel i.e.,
α1 0 in equation (3.4) or (4.1). In order to overcome this criticism
we may include additional regressors in our estimated equations to account for the bank
specific characteristics that explain the part of the growing trend in bank credit not
accounted for by growth in deposits or other included regressors22. The introduction of the
bank capital in our estimated equation may also be justified on theoretical grounds. For
instance, Courakis (1988) develops a model for banking behaviour in which banks, in
order to maximise profits, are assumed to decide on the amount of each asset (reserves,
loans, securities, etc.) and each liability (money market funds, certificates of deposits, etc.)
that they are able to control. Balance sheet items not controlled by the bank or that the
bank cannot manipulate in the short run are treated as exogenous (capital, for instance).
The author shows that in this case the amount of each asset held by the bank (liabilities are
treated as negative assets) is a function of the interest rates on all the assets (including
liabilities) as well as of the levels of the items assumed exogenous to be bank.

So, in the context of the Courakis model our loan supply function can be interpreted
as resulting from a profit maximising behaviour of a bank in which both deposits and
capital are treated as exogenous. The bank is assumed to choose the volume of credit,
securities and external finance, in order to maximise the expected profits for a given level

22 In these situations it is customary to include a linear time trend into the regression (or several time
trends, which in the limit may be bank specific). This linear trend, which is usually seen as a proxy for all the
omitted regressors is better justified in terms of the cointegration results. If the variables (integrated of order
one with a non zero drift) are deterministically cointegrated there is no need for the introduction of time
trends, but if the variables are only stochastically cointegrated then we need to “explain” the deterministic part
of the credit growth not accounted for by the included regressors, by introducing a time trend (or bank specific
time trends) into the regression. In our case there seems to be no need for the use of such time trends.

24



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