Central banks play a crucial role in mitigating the negative impact of uncertainty and shocks caused by economic and financial crises. This paper examines the transmission of BSP monetary policy actions through the interest rate and bank lending channels using a panel vector autoregression model on a sample of 139 banks for the period Q1 2008 to Q4 2022. Specifically, this paper identifies the impact of changes in the policy rate and reserve requirement on bank lending activity while exploring the role of bank characteristics (e.g., deposits, liquid assets, asset size) as well as overall credit conditions and market sentiment in the monetary policy transmission process. The estimation includes indicators of system liquidity, secondary market interest rates, and exogenous controls for output growth, inflation, and dummy variables for potential structural shifts.
Consistent with economic theory, increases in the monetary policy rate and reserve requirement were found to have a significant negative impact on bank lending activity. For the key policy rate, a one percentage point increase leads to a decrease of approximately 1.6 percent in the quarter-on-quarter bank lending growth for the current quarter with continuing impact over the next two years. For the reserve requirement, a one percentage point increase is expected to immediately reduce bank lending activity by 0.6 percent quarter-on-quarter with the contraction lasting for about three quarters. Looking at bank characteristics, a stronger balance sheet is seen to encourage more lending amid monetary policy tightening, although banks in the Philippines were seen to maintain their liquidity to safeguard against prevailing shocks. The total cost of funding and bank-specific characteristics were also found to have the greatest contribution to the variation in bank lending growth. Finally, the observed weakness and delay in the impact of monetary policy rate adjustments on bank lending activity during the COVID-19 pandemic and the recent episode of elevated inflation could be attributed to other confounding factors, such as credit risk and market sentiment.