Bank Lending and Monetary Policy: Evidence from Deposit Money Banks (DMBs) in Nigeria

Monetary policy is aimed at attaining price stability, full employment and moderate long-term interest rates in the economy based on regulatory authority priorities, prevailing economic and financial conditions. Using annualized time series data from DMBs in Nigeria and the Vector Error Correction Model (VECM) as well as the simulates generalized impulse response functions, this study assessed the dynamic interactions between bank lending and monetary policy by observing how banks’ lending patterns are influenced by changes in monetary policy over the years in Nigeria.The result revealed that bank lending responds to short run changes in monetary policy but there is no long run influence from monetary policy to bank loan as banks adjust their portfolio mix in line with the prevailing monetary policy. Similarly, it revealed that changes in monetary policy often create fluctuations on bank health and as such regulatory authority must focus on factors such as monetary policy rate and bank capital that influence bank position in order to attain a significant economic performance using banks as a monetary policy transmission mechanism to the economy.


Introduction
In every economic setting, monetary policy is aimed at creating a functional means of managing interest and employment rate. However, the prime motive is the maintenance of price stability by the apex/regulatory bank which motivate long-term economic growth and employment (Turguttopbas, 2017). The key monetary policy components comprise Open Market Operations (OMO), discount rate and reserve requirements fixed by the central banks. The OMO involved trading activities by central banks on government financial securities at market determined prices while the discount rate represent the interest rate charged by central banks on short-term loans to depository institutions. The OMO and discount rate complements each other and serves as a buffer for commercial banks liquidity.
Thus, a reduction in the central bank discount rate is an expansionary policy because it influences other interest rates in the economy and vice versa. Similarly, the reserve requirements affect depository institution liquidity as it influence the size of fund available for money creation. A decline in the central bank stipulated reserve www.cribfb.com/journal/index.php/amfbr 2 requirements is expansionary because it increases the size of funds available for onward lending to consumers and businesses in the banking system.
Consequently, the influence of monetary policy in an economy can be realized through various channels termed monetary policy transmission mechanism by various scholars such as Schneider (1998) and Van den Heuvel (2002). However, changes in monetary policy changes flows through a lag effects on price movements and several studies have analysed the effects of changes in the monetary policy rate on different financial institutions, instruments and market.
Thus, this study examines how DMBs activities reflect changes in monetary policy by examining the short and long-run relationship between bank lending and monetary policy in order to observe how banks' lending patterns are influenced by changes in monetary policy over the years in Nigeria. Similarly, this paper seeks to contribute to the capital-credit-crunch and bank-capital-channel discourse through an empirical study. The remaining segments of this study comprise brief literature review, research methods, results and conclusions.

Brief Literature Review
Several banking models as underlined the prominent role of capital in banking operation such as loan loss absorption, asymmetric information mitigation and serving as a guide for investment decision [Mankiw (1986), Bernanke &Gertler (1987), Holmstrom & Tirole (1997), and Meh & Moran (2004)]. Similarly, some studies examined the influence of bank credit allocation and capital in the economy for example, Bernanke and Lown (1991) observed that bank capital positions have a significant effect on bank lending, but indifferent to employment. Peek and Rosengren (1995) perceived that a decrease in bank capital negatively affect deposits while loans would decrease due to contraction in bank capital while Hancock and Wilcox (1997) found that changes in bank capital significantly affects commercial loans, but not residential loans. Schneider (1999) studied the interaction between bank's borrowing limit and heterogeneity in borrowing and lending behaviour across banks using financial imperfection in moral hazard problem associated with entrepreneurial bankers strategic defaults. Thus, banks often hold inside capital in order to mitigate against operational based problems.
Some studies examined monetary policy influence on loan growth through the monetary transmission mechanism via bank capital contraction. For example, Kishan and Opiela (2006) studied bank lending and credit channel through monetary policy and loan growth. They observed that bank loan growth are more sensitive to fluctuation in monetary policy. Similarly, Den Haan et al. (2007) showed that commercial and industrial loans increase due to contractionary monetary policy as banks adjust their loan portfolios in line with optimistic expectations in commercial loans. Gambacorta and Mistrulli (2004) and Bolton and Freixas (2006) opined that a distinct bank capital channel is essential in studying monetary transmission mechanism as bank capital serves as an important factor in monetary policy operation that may hinder or expand its effects.

Research Methods
In order to avoid some empirical challenges faced by earlier studies on bank lending and monetary policy, such as causality identification, banking structure, regulation accounting changes as well as A famous means of resolving such identification problem is the Sims' (1980) strategy which involve orthogonalizing the innovations through the Cholesky decomposition.

as Final Prediction Error (FPE), Akaike Information Criterion (AIC) and
Hannan-Quinn information criterion (HQ) favour 2 as the ideal lag for the study.    7 over time. However, loans respond positively to changes in liquidity ratio in shot while but it turn and respond negatively towards the liquidity ratio (LR).

Conclusion
The crucial roles of banks in economic growth and development cannot be underplay despite the adverse consequence of their failure or distress in the economy. In order to address such potential and managed the  Response of MPR to GDP

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