Sunday, October 16, 2016: 12:15 PM
This paper’s main objective is to investigate effects of monetary policy on the UK banking sector, especially effects of monetary policy on the commercial banks’ loan and security holdings. The banks are grouped into: big, medium and small sizes and the paper examines if responses from these banks to policy changes differ. The paper, therefore gives some new evidence on the effects of monetary policy on the UK banking sector based on their size using disaggregated data for the period 2006 - 2015. Estimates are carried out on each of the sub-samples. Analysis are conducted of the impact policy changes have on the banks' loans and securities. The results indicate that the size of the financial institution matters when it comes to responding to the monetary policy changes as it is evident that different size banks responded differently to monetary policy shocks. The medium size banks suffer more than the big and small banks from shocks that emanate from tightening monetary policy. The policy implication of the results is that if more lending comes from the medium banks, then monetary policy transmission will be very effective as changes in policy can easily passed to the customers. If, on the other hand, most loans are from the big and small banks, this will cast doubt on the effectiveness of monetary policy and particularly of monetary policy transmission during the sample period.
JEL Classification:E01, E52, E58
Key Words: Monetary policy, Financial Institutions, Banking sector, Financial institutions, Money Demand/ interest rates, Money supply/policy