Industries and the Bank Lending Effects of Bank Credit Demand and Monetary Policy in Germany

This paper presents evidence on the industry effects of bank lending in Germany and asks whether bank lending to single industries depends on industry-specific bank credit demand or on monetary policy as determinant of bank credit supply. To this end, we estimate individual bank lending functions for 17 manufacturing and non-manufacturing industries and five banking groups using quarterly bank balance sheet and bank lending data for the period 1992:1-2002:4. The evidence from dynamic panel data models illustrates that industry bank lending responds more to changes in industry-specific bank credit demand than to changes in monetary policy. We report evidence in favor of a credit channel through bank lending, but find the bank lending effects of monetary policy to be very sensitive to the choice of industry. The empirical results, hence, lend strong support to the existence of industry effects of bank lending. In view of this finding, we conclude that bank lending growth and monetary policy effectiveness crucially depend on the industry composition of bank credit portfolios.