Does competition influence the bank lending channel in the euro area?

This paper examines how competition influences the bank lending channel in the euro area countries. Using a large panel of banks from 12 euro area countries for the period 2002-2010 we analyze the reaction of loan supply to monetary policy actions depending on the degree of bank competition. We find that the effect of monetary policy on bank lending is dependent on bank competition: the transmission of monetary policy via the bank lending channel is less pronounced for banks with extensive market power. Further investigation shows that banks with less market power were more sensitive to monetary policy only before the financial crisis. These results suggest that bank market power has a significant impact on the effectiveness of monetary policy. Therefore,wide variations in the level of bank market power may lead to asymmetric effects of the single monetary policy. (c) 2014 Elsevier B.V. All rights reserved.