Channel of bank loans, Channel of balance reporting...

Bank Loan Channel

Increasing the supply of cash or easing banking regulation increases the ability of banks to provide credit.

When the money supply at the hands of the population grows, deposits in banks increase. Banks also get new opportunities for issuing loans, including investment. Credit volumes are growing - investments are increasing.

The degree of effectiveness of this channel depends on trust in the whole to the banking system on the part of the population, as well as on the degree of riskiness of the economy, industry or region. With high confidence, money willingly goes to the banking system, the capacity of the monetary multiplier increases, the efficiency of the credit channel increases. If confidence is low, even with an increase in the money supply, the population will prefer to invest additional money either in currency or in durable goods, or leave "under the mattress" at home, avoiding the banking system. The credit mechanism of banks will work inefficiently.

However, even if banks receive a significant number of new deposits, credit expansion may slow down in the absence of good investment opportunities. Too risky industry, region, country are factors that limit the credit channel of banks.

The channel of bank loans is important for the economy for two main reasons. First, the problem of asymmetric information and unscrupulous behavior of the borrower is especially acute in the credit market. The loan rate alone can not be a factor in selecting good investment projects, since high-risk and unscrupulous firms are more likely to take loans at high interest rates. The Bank has professional capacity to mitigate this problem. Secondly, some borrowers, such as small businesses or new innovative firms, could not obtain a loan elsewhere, if not in the bank, because of a lack of reliable guarantees, established reputation or good surety. Therefore, monetary policy has a more significant impact on small firms than on large corporations.

Balance Sheet Channel

Another possibility of MTM is related to the effect of accounting. With the increase in the money supply, the demand for securities of companies is also growing. The stock price is increasing. But shares and other securities, as a rule, are part of the net assets of firms. Hence, if the stock price grows, the net assets of companies also increase. With the growth of the value of net assets, the credit capabilities of firms expand. Assets can be provided as collateral for a loan, especially for investment purposes. The increase in the cost of collateral due to the growth of the share price means for companies the possibility of obtaining a new loan. This increases the investment of these firms.

When the stock price falls, the cost of collateral is reduced, banks are less willing to lend, investments are reduced. Usually, increased activity on the stock exchange and an increase in the price of securities occur during the period of economic recovery, and the fall in the share price is a characteristic not only of the stock market, but also of the overall economic recession and crisis. Therefore, it is quite easy for firms to obtain loans and increase investments during the recovery period (in fact, it is precisely this that determines the recovery period, the period of the investment boom) and it is very difficult to find additional financing in the event of a slowdown in economic activity. Although businesses can still do quite well, the very nature of compiling corporate balance sheets and providing collateral can dramatically curtail financing opportunities overnight. Credit squeeze often acts as a key factor in the crisis.

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