Effects of banking sector and capital market development on the bank lending channel of monetary policy: An ASEAN country case study

This paper examines the bank lending channel of monetary policy transmission and the effect of banking sector and capital market development on the lending channel using the bank-level panel data of 89 commercial banks in five ASEAN countries (Thailand, Malaysia, the Philippines, Singapore and Indonesia) over the period 1999-2011. The results show that monetary policy has a significant effect via the bank lending channel. The higher the capitalization and liquidity of banks, the weaker the effect of monetary policy via the bank lending channel; however, the greater the size of banks, the stronger the bank lending channel. Banking sector development in terms of banking activities and capital market development leads to a weaker effect of monetary policy through the lending channel, while the development of banks in terms of size strengthens the bank lending channel.