UC Davis

This dissertation consists of three essays on the monetary policy pass-through to financial markets and bank balance sheets. I use frontier econometric methods combined with rich micro and macro-level datasets to examine the effect of monetary policy on financial markets and banks' balance sheets, focusing on how specific bank and market characteristics amplifies the monetary policy transmission mechanism. Moreover, I show that monetary policy transmits to real economic outcomes through financial markets and banks' balance sheets. Finally, I complement my empirical findings with theoretical models to identify the underlying monetary policy transmission mechanisms.

The first chapter of my dissertation studies the effect of market power on monetary policy transmission to banks' funding dynamics, lending, and profitability by comprehensively studying the interactions among the deposit, wholesale funding, and credit markets, which is missing in the literature. In this chapter, I document the heterogeneous impact of monetary policy on banks' deposit, wholesale funding, and lending spreads depending on the degree of their bank market power. Specifically, I show that after an increase in the policy rate, banks with higher market power increase their deposit and loan rates less and access wholesale funding markets at a relatively lower cost compared to other banks. Hence, banks with higher market power counterbalance the fall in their deposit inflows by increasing their reliance on wholesale funding, and their lending decreases less than other banks following a monetary contraction. This "wholesale funding channel" dampens the adverse effect of contractionary monetary policy on their lending and profitability. I further show that bank market power affects monetary policy transmission to the real economy through its impact on bank-level lending. In particular, aggregate lending and employment decrease less in areas served by banks with higher market power after an increase in the policy rate. Finally, I rationalize my empirical findings by building a theoretical model with monopolistic competition. In the model, banks with higher market power access wholesale funding markets at a lower cost, which generates imperfect pass-through of monetary policy.

The second chapter of my dissertation provides a new channel of monetary policy-pass-through to bank lending and lending rates, "bank liquidity channel". In particular, I evaluate monetary policy pass-through conditional on bank liquidity using rich bank-level balance sheets and income statement data. I find that after an increase in the policy rate, funding inflows of banks decreases and constrain banks' loan originations. However, banks with less liquid balance sheets reduce their loan supply more due to their liquidity constraints. In particular, these banks start to shrink their balance sheets by reducing their loan originations as they don't have enough buffer stock liquidity to deplete when they face an adverse shock. Second, I document that banks with less liquid balance sheets increase their loan rates more than other banks following a monetary contraction. Lastly, I build a theoretical model with heterogeneous banks that explains the underlying mechanism. In the model, bank liquidity constraints combined with monopolistic competition impose frictions on monetary policy pass-through to bank lending rates, where there is no deposit rate dispersion among banks based on their liquidity position.

Finally, Chapter 3 studies the impact of maturity mismatch between banks' assets and liabilities on monetary policy transmission to bank profitability and asks whether the role of the maturity mismatch channel has changed during the zero lower bound (ZLB) environment. Using high-frequency monetary policy surprises that allow me to separate the effects of conventional and unconventional monetary policy, I first show that bank stock prices decrease significantly after contractionary federal funds rate and forward guidance shocks. That is, the indirect effects of contractionary monetary policy (e.g., the signaling impact of a weaker economy, higher default probabilities, and a weak bank balance sheet performance) outweigh its direct effect (the expected improvement in net interest margins) on banks' stock prices. I then document that banks with larger maturity mismatch are affected less negatively from the contractionary monetary policy surprises as their expected net interest margins rise more after an increase in the level and slope of the yield curve. Turning to the zero lower bound (ZLB) environment, I show that large-scale asset purchases (LSAP) that decrease the long-term yields affect bank stock prices positively during this period. However, the maturity mismatch channel ceased to exist in the ZLB environment. Specifically, the response of bank stock prices stopped varying depending on the maturity structure of their balance sheets, indicating a limitation to unconventional monetary policy.