The Effect of Market Power in the Banking System on the Lending Channel: Evidence from Iran

The main purpose of this investigation is to examine the impact of the banking market structure on the effectiveness of monetary policy transmission through the bank lending channel. In the first step, we computed the banking sector's market power during 2001 to 2014. In the second step, we evaluated loan growth to measure market power in the banking sector as one of the independent variables. In this order, we used panel data regression with fixed effects approach. In this paper, we measured market power by using frontier cost function. We used macroeconomic variables and balance sheet data of 33 banks to estimate the model and evaluate the factors affecting the lending channel. The results indicate that an increase in the market power has a negative effect on the bank lending channel of monetary transmission. Also, the results show the increase in bank debts to the central bank as a monetary policy indicator has a positive and significant but weak effect on the lending channel of the banking system.