Dr. Chetan Dave of the University of Texas as Dallas presented the findings of "The Bank Lending Channel: a FAVAR Analysis," co-authored with Scott J. Dressler and Lei Zhang, in a DSG Research Seminar on July 20.

Abstract
The bank lending channel (BLC) of monetary policy concludes that significant movements in aggregate bank lending volume follow changes in the stance of monetary policy. Since the seminal contribution of Bernanke and Blinder (1992), this channel has been a prominent mechanism in the literature on monetary transmission. The BLC focuses on the balance sheets of commercial banks and assumes that insured, reservable deposits and other forms of external loan finance (e.g. time deposits, CDs, etc.) are not perfect substitutes due to the higher costs of acquiring the latter. Therefore, a monetary contraction resulting in less reservable deposits should result in a decrease in the supply of loans. This decrease in the supply of loans then reduces available credit, out of which firms can engage in physical investment and/or consumers can engage in spending. Thus, the resultant decrease in investment and consumption causes a contraction in real GDP.

This paper empirically examines the BLC of monetary transmission in a factor-augmented vector autoregression (FAVAR). A FAVAR exploits a large number of macroeconomic indicators to identify monetary policy shocks, and commonly used lending aggregates for the U.S. are added, as well as lending data at the bank level. While the results suggest that the BLC is stronger than previously thought, this feature is not robust. In addition, the results indicate a diffuse response to monetary innovations from individual banks grouped across asset sizes and loan components. Therefore, we find validation of the channel using aggregate data but this aggregate response is not robust to the inclusion of data at the bank level.