Syden Mishi, Asrat Tsegaye
The traditional debate of whether bank based or market based economies are better is being overtaken by the one on: to what extent they can complement one another. Capital budgeting model posits that bank loans are an investment which faces capital cost snag arguing that market valuations of bank stocks reflect that cost. This study empirically examines whether stock markets can provide valuable information in bank loan supply decision making. Stock market channel of monetary policy transmission is investigated in a J-type non-nested hypothesis testing format for the case of South Africa. The results point to a significant role played by stock market in determining the lending pattern of banks. The non-traditional (stock market) bank lending channel hypothesis cannot be rejected for South Africa. The results indicate the presence of stock market channel of monetary policy transmission, thus vindicating the appropriate intermediate target for the central bank to be price level. Furthermore, the results point to the possibility of stock market discipline of banks as, indeed, stock markets have been found to be significantly linked to banks’ operations as being both information aggregator and provider. Bank lending is thus dependent on the stability of stock prices.