Monetary policy and bank lending in a low interest rate environment: Diminishing effectiveness?

This paper analyses the effectiveness of monetary policy on bank lending in a low interest rate environment. Based on a sample of 108 large international banks, our empirical analysis suggests that monetary policy is less effective in stimulating bank lending growth when interest rates reach a very low level. This result holds after controlling for business and financial cycle conditions and different bank-specific characteristics such as liquidity, capitalisation, funding costs, bank risk and income diversification. We find that the impact of low rates on the profitability of banks' traditional intermediation activity helps explain the subdued evolution of lending in the period 2010-14.