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

Columns (5) and (6) display the models with liquidity as the bank specific
characteristic. The first important point to note is that both the coefficients of
ln(D/ P)_it z_it and ln(K/ P) _it z_it are statistically not different from zero. The fact that the
coefficient of ln(D/ P)_it z_it is zero means that in the Portuguese case the dependence of
banks on deposits does not depend on the bank liquidity ratio³³. On the other hand, it turns
out that the coefficient of the credit interest rate is lower for illiquid banks³⁴ (as the
coefficient of l_t z_it is positive) and this means that the supply curve is flatter. This reduces
the importance of the credit channel for the illiquid banks. As we have seen, due to the
existence of credit ceilings and compulsory minimum ratios of public debt, the Portuguese
banks displayed a huge liquidity ratio at the beginning of the sample period, which
steadily decreased later (after 1995 banks were also able to progressively sell the public
debt to foreign banks). This also means that in our case, using the sample average to proxy
the long run equilibrium liquidity ratio is probably not a good solution, because it implies
that (almost) all the banks exhibited excess liquidity during the first half of the sample and
scarcity of liquidity during the second half of the sample, when in fact it may have been
the case as the data suggest (the liquidity ratio further decreased in 1998) that the liquidity
ratio was above the true long run equilibrium level all over the sample period. So, it may
well be the case that the coefficients of l_t z_it and of s_t z_it appear significantly different
from zero because they are capturing the effects of a potential structural break occurring in
the period, as we shall see below. All in all, a sensible conclusion seems to be that
liquidity in the Portuguese banks, during the nineties has not played the role of a shield
against monetary policy shocks.

Columns (7) and (8) display the two models estimated with the capitalisation ratio as
the interaction variable. In this case we have β₂ < 0 and β₆=β₈=0, and thus, we can
definitely conclude that the credit channel appears to be more important for less
capitalised banks.

Let us now address the stability issue. The above conclusions are valid under the
implicit assumption that the models estimated in Table 5 are stable. But if we look again
at Chart 1 we immediately realise that during 1996 and 1997 the credit growth rate
increased relative to the deposits growth rate, coinciding with the increase in the external
non-deposits funds coming from abroad (actually, this characteristic in the data is still

³³ We note that this conclusion depends on the fact that the liquidity variable is defined as in (8.4). If we
rather define liquidity as in (8.3) the coefficient of ln(D / P)_it z_it appears significantly different from zero and
negative. This result shows that the way the z_it is defined really matters for the empirical analysis.

³⁴ Remember that an illiquid bank is one for which the current liquidity ratio is below the long run
equilibrium liquidity ratio (proxied by the sample average liquidity ratio).

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