A crucial condition for the existence of a credit channel through bank loans is that monetary policy should be able to change bank loan supply. This paper contributes to the discussion on this issue by presenting empirical evidence from dynamic panel estimations based on a dataset that comprises individual balance-sheet information on all German banks. It shows that the average bank reduces its lending more sharply in reaction to a restrictive monetary policy measure, the lower its ratio of short-term interbank deposits to total assets is. This result is robust against a broad variety of changes in the specification. A dependence on its size can be found only if explicitly controlled for this dominating effect and/or if the very small banks are excluded. Overall, the evidence is compatible with the existence of a credit channel, although it is weakened by the banks\ub4 liquidity management.
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