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Does bank competition influence the bank lending channel in the Eurozone?

Zuzana Fungáčová
Bank of Finland

Laura Solanko
Bank of Finland

Laurent Weill
EM Strasbourg Business School, University of Strasbourg

This paper examines how bank competition influences the bank lending channel in the Eurozone countries. Using a sample of banks from 12 Eurozone countries over the period 2002-2010 we analyze the reaction of loan supply to monetary policy actions depending on the degree of bank competition. We find that enhanced competition strengthens the transmission of monetary policy through the bank lending channel. Thus our results support the view that the single monetary policy might have asymmetric effects in Eurozone countries depending on their level of bank competition. Further investigation shows that more competitive banks were more sensitive to monetary policy only before the financial crisis. Policy recommendations are the support for convergence in the levels of banking sector competition in the euro area to make monetary policy transmission more symmetric and enhancing bank competition to make the monetary policy more effective.

JEL codes: E52, G21
Keywords: bank competition, bank lending channel, monetary policy, Eurozone


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