Bank Competition and Monetary Policy: Evidence from Taiwan

Chung-Wei Kao, Jer-Yuh Wan

Takming University of Science and Technology (Taiwan), Tamkang University (Taiwan)

This paper examines the role of bank competition for the transmission of monetary policy through the bank lending channel, using bank level data of Taiwan over the period from 2006 to 2020. And the parts of banks' characteristics, i.e., size, capitalization and liquidity, playing in the banks' response to monetary policy shocks are also considered. Our results suggest that banks with market power, which is proxied by the Lerner index, have a credit supply that is less sensitive to monetary policy shock. Therefore, increased competition enhances the effectiveness of monetary policy transmission through the bank lending channel. These findings are robust in relation to alternative measures of bank competition such as CR3, CR5 and HHI. In terms of policy implications, following the global financial crisis, the literature indicates the macroprudential policies requiring banks to raise capital to improve financial stability may have adverse effect on bank competition. Therefore, the monetary authority should be concerned and cope with the weakening impact on the efficacy of monetary policy from the increase in market concentration accompanied with the implementation of the macroprudential policies.

Article link: https://www.asianinstituteofresearch.org/JEBarchives/bank-competition-and-monetary-policy%3A-evidence-from-taiwan