Prolonged Low Interest Rates and Commercial Bank Lending Behavior: A Case Study of Thailand

Abstract

PURPOSES: This paper looked into the sensitivity of bank lending to bank liquidity behavior ratio and effects of low interest rates upon the sensitivity. METHODS: The study used a two-step procedures, panel vector autoregressive models (Panel VAR), to obtain impulse response functions (IRFs) revealing consistencies in the movement of different variables in response to interest rate shocks.  The paper used bank level data from 19 commercial banks in Thailand from the first quarter of 2001 to the first quarter of 2019, to measure the effectiveness of bank lending channels. Finally, policy implications form the study were analyzed. RESULTS: Banks altered lending behavior under extended low interest rates. This lending behavior affected the effectiveness of quantitative casing monetary policy of the commercial banks. CONCLUSIONS: Prolonged low interest rates caused commercial banks to adjust their lending behavior and, thereby, diminished the effectiveness of expansionary monetary policy.