Impact of bank competition on the bank lending channel of monetary transmission: Evidence from China

- Examining the impact of bank competition on the bank lending channel in China
- Banks with less market power tend to increase loan growth and are less sensitive to monetary policy shocks.
- Bank competition reduces the effectiveness of monetary policy.
- The impact is strongest for city-commercial banks, highly-liquid and well-capitalized banks.

This paper examines how competition influences the loan supply reaction of banks to monetary policy through the bank lending channel and test whether this reaction differs in heterogeneous bank types. Based on a sample of Chinese banking micro-data over the period from 2003 to 2014, we find that increased competition in China's banking sector reduces the effectiveness of monetary policy transmission through the bank lending channel, and this impact is strongest for city-commercial banks, highly-liquid and well-capitalized banks. These results shed light on the need for the central bank to monitor the development of competition and market structure to improve the effectiveness of monetary transmission.