Banking Competition and the Lending Channel : Evidence from Bank-Level Data in Asia and Latin America

This paper examines how banking competition affects the transmission of monetary policy through the bank lending channel. Using bank-level panel data for commercial banks of ten Asian countries and ten Latin American countries during the period from 1996 to 2006, we apply a two-step estimation procedure. In the first step we measure the degree of banking competition by applying the methodology proposed by Panzar and Rosse (1987). The results show that the banking sector in these economies has experienced an increase in competition since the mid 1990s. In the second step we estimate a loan growth equation where the explanatory variables include the Panzar-Rosse measure of banking competitiveness. The estimation results provide consistent evidence that increased competition in the banking sector weakens the bank lending channel. This is especially so for banks with high liquidity and large size. We also find that overall, banking competition in Latin America is higher than in Asia, making the bank lending channel weaker there. We also discuss policy implications of the main findings of the paper