Bank loan portfolios and the monetary transmission mechanism

We study the portfolio behavior of bank loans following a monetary tightening and find that real estate and consumer loans sharply decrease, while commercial and industrial (C&I) loans increase. These responses are compared with responses following non-monetary shocks, which also reduce output but keep interest rates roughly unchanged. During such a “non-monetary” downturn, C&I loans sharply decrease, while real estate and consumer loans show no substantial response. These responses, together with the responses of relevant lending rates, are hard to reconcile with a decline in the supply of C&I bank loans during a monetary downturn as stressed by the bank-lending channel. Several arguments are presented explaining why the supply of C&I loans may actually increase after a monetary contraction.