Banks and the Transmission of the Monetary Policy in the West African Economic Union

Mercredi | 2015-05-27

Désiré KANGA

This paper aims at reviewing the role of banks in the transmission of the monetary policy in the West African Economic and Monetary Union (WAEMU). The banking sector of this region is small, well-capitalised and highly liquid. In addition, it is highly concentrated and slightly competitive. According to the literature, in that case, the credit channel seems to be the only channel of transmission of the monetary policy. However, the reliability of this channel depends on the banks and the institutions. I extend the model of Mishra et al. (2014) to take into account the role of capital and institutions in the transmission of monetary policy. Based on the model and the literature, I check the validity of the determinants of bank lending in the WAEMU conditional to the institutions measured by civil liberties.I find that bank lending is affected by the quality of institutions, the capital and the size of the banks as well as their liquidity and risk positions. In particular, the size of the bank and the constraint of capital strongly affect the lending. In case of tight monetary policy, the higher the bank is capital-constrained the stronger the reduction of lending. Poor institutions also impair the transmission of monetary policy by penalizing capital-constrained banks. In fact, an unfavorable environment involves additional costs and results in a decline in credit.