The lending channel of monetary policy has been a topic of research for many economists and policymakers. The general wisdom is that when the central bank adopts a monetary policy tightening by raising the interest rates, this leads to a rise in the funding costs of banks and therefore a reduction in loan growth. The studies reveal that lending channel of monetary policy works for many economis but the reaction of banks to changes in monetary policy is not uniform and depends on various factors. In this regard bank fundamentals have a significant impact on the lending channel of monetary policy. Peek and Rosengren (1995) find that bank capitalization measured by the ratio of capital to total assets, affects the reaction of banks to monetary policy. Kishan and Opiela (2000) investigate lending channel of monetary policy for U.S. banks from 1980 to 1995 and they find that small banks and undercapitalized banks are more affected by monetary policy. Kashyap and Stein (2000) also analyze the monetary transmission mechanism for U.S. banks and find that the lending channel of monetary policy has larger impact on banks with lower ratios of cash and securities to assets.
The studies also reveal that bank ownership and the level of competition in the market also affect the lending channel of monetary policy. Macit (2012) studies the Turkish banking sector from 2006 to 2010 and investigates whether the ownership structure of banks affects their response to monetary policy. He finds that public banks show the smallest reaction to monetary policy, whereas foreign banks are the most responsive banks. (2) Bhaumik, Dang and Kutan (2011) analyze the implications of bank ownership for lending channel of monetary policy for Indian banking sector. They find that bank ownership has significant impact on the reactions of banks to monetary policy. Olivero, Li and Jeon (2011) investigate the impact of level of competition in banking sector on the lending channel of monetary policy by looking at the data for commercial banks in 10 Asian and 10 Latin American countries from 1996 to 2006. They find that the lending channel of monetary policy is weakened as the level of competition increases.
The contribution of this paper to existing literature is that it investigates the lending channel of monetary policy for Turkish banking sector and analyze whether banks' reactions to monetary policy change depending on their type. In particular, I investigate whether there is a systematic difference in the response of commercial banks and participation banks to changes in monetary policy. In Turkish banking sector there are three types of banks, namely commercial banks, participation banks, and investment and development banks. (3) Table 1 shows the number of banks and total asset size for each type by the end of the third quarter of 2011. In Turkish banking sector commercial banks significantly dominate the sector and they hold about 92.5% of the total assets in Turkish banking sector. Participation banks operate according to Islamic rules in their lending and deposit collection activities and they own about 4.4% of total assets in the sector. As opposed to commercial banks they do not promise a fixed interest payment to their depositors. Instead, the funds that are collected from depositors are utilized in trade and industry and the profit that is obtained from the lending pool is shared by the depositors. The name "participation banks" also stems from the fact that the depositors participate in profit or loss that results from the activities of the bank. As can be seen in Figure 1 and Figure 2, even though these banks occupy a small place in the sector, their rapid growth rate implies an important future potential for these banks.
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In order to investigate whether there is a difference in the reactions of commercial banks and participation banks to changes in monetary policy I look at the quarterly loan growth of these banks and see how it is affected from a change in monetary policy instrument. …