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DOCTORAL SCHOOL OF FINANCE AND BANKING. The bank lending channel in Romania -Solving the Supply versus Demand Puzzle-. Student: Stoica Mihai Supervisor: Professor Moisă Altăr. Theoretical background.

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the bank lending channel in romania solving the supply versus demand puzzle


The bank lending channel in Romania-Solving the Supply versus Demand Puzzle-

Student: Stoica Mihai

Supervisor: Professor Moisă Altăr

theoretical background
Theoretical background

According to the bank lending channel transmission mechanism, banks respond to a monetary contraction by reducing the supply of bank loans.

  • Two conditions must hold simultaneously for the bank lending framework to be valid:
  • the central bank must be able simply by conducting monetary policy measures to influence the supplyof bank loans- i.e.banks are not able to frictionlessly substitute the out-flowing deposits
  • some firms must be dependent on bank loans- i.e. firms are not able to frictionlessly substitute between bank loans and another types of loans due to information problems
identification of the bank lending channel
Identification of the bank lending channel

Bernanke and Blinder (1992)- they observe the reaction of the aggregate bank lending to a change in monetary policy stance

Kashyap and Stein (1994), Favero, Giavazzi, Flabbi (1999), de Bondt (2000), Kakes and Sturm (2000) - improve the identification of the lending channel by using desegregated bank balance sheet data.

Hallsten(1999) and Italiano(2001) use interest rate spreads (e.g. the spread between banking sector lending rate and the overnight interest rate).

The hypothesis of this paper:The Romanian bank loan is supply determined (a bank lending channel is at work)
  • The econometric evidence (sample 1995:01 2003:01):
  • a preliminary regression and VAR analysis
  • estimating a set of disequilibrium models

The mainfinding:

The Romanian loan market is supply driven, being characterised by a state of disequilibrium throughout the sample period.

descriptive analysis of the romanian loan market
Descriptive analysis of the Romanian loan market
  • slow structural reforms, weak confidence in the national currency and in the domestic banking lead to a process of acute process of demonetisation and disintermedition
preliminary regression and var analysis a regression analysis cragr as dependent variable
Preliminary regression and VAR analysisA. Regression analysis (cragr as dependent variable)
b var analysis variables cragr m0r r nbr ipsa lag order 3 sample 1995 01 2003 01
B. VAR analysis( variables: cragr, M0r, r_nbr, ipsa lag order: 3 sample:1995:01 2003:01)
  • B.1 Impulse response functions and Granger causality tests
  • responses to a monetary innovation

Response of industrial production to a bank loan innovation

  • response of credit to an interest rate innovation

Considering the simplifying assumption we will get the following likelihood function:

initial conditions
Initial conditions

1.with i=1,2


3. for


  • Romanian bank lending was mainly supply driven throughout our sample
  • however, the bank lending channel of monetary policy is not complete due to the bank loan neutrality over output
  • the sporadic demand regime periods (spanning from 1997 until 1999 ) were due to a demand decline in the context of harsh economic conditions
  • from the year 2001 onwards the process of remonetisation was quite vigorous, re-establishing loan market equilibrium

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*** National Bank of Romania : Annual Reports, Monthly Bulletins

*** IMF Country Reports 03/123 May 2003, 03/12 Jan. 2003, 03/11 Jan. 2003, 02/254 Nov. 2002