Chapter 10: Market Illiquidity and the Bank Lending Channel

This study analyses how stock and bond market illiquidity affect the bank lending channel. Our empirical analysis comprises a sample of 862 listed banks from 21 OECD countries between 2002 and 2015. We find that the bank lending channel plays an important role in the transmission mechanism of the monetary policy when financial markets are very liquid. However, as market liquidity decreases, the bank lending channel becomes less relevant and ends up being ineffective.