Heterogeneous bank loan responses to monetary policy and bank capital shocks: a VAR analysis based on Japanese disaggregated data

In this paper, we study bank loan responses to monetary policy and bank capital shocks using Japan’s disaggregated data sorted by borrower firms’ size and industry. Employing a block recursive VAR, we demonstrate that bank loan responses exhibit large sectoral heterogeneity. Among a broad range of indicators about borrower firms’ characteristics, the heterogeneity is tightly linked to borrower firms’ liability conditions. Firms with a lower capital ratio tend to experience larger drops in bank loans following a contractionary monetary policy shock and/or a negative bank capital shock. In addition, we find that firms’ substitution motive from alternative financial measures also explains the heterogeneity, while the firms’ inventory motive that is stressed in the empirical literature for U.S. banks does not. Our results indicate the importance of considering a compositional shift of bank loans across borrower firms in implementing accommodative monetary policy and capital injection policy.