Digital transformation and the bank lending channel

Purpose This paper examines how digital transformation influences the relationship between monetary policy and bank lending. Design/methodology/approach The research draws on data from Vietnamese commercial banks from 2007 to 2023 to empirically investigate the bank lending channel. To overcome the shortcomings of current measures of digital transformation, the study employs a government-issued digital transformation index, which integrates various aspects of digitalization. Alongside utilizing a fixed-effects estimator for the primary analysis, the study tackles potential endogeneity concerns by employing the two-step system generalized method of moments (GMM) as well as the two-stage least squares (2SLS) technique. Findings The findings indicate that digital transformation reduces the effect of monetary policy on bank loan growth. Accordingly, banks that are more advanced in their digital transformation efforts are less responsive to monetary policy changes. This pattern is consistent across both rate-based and quantitative-based monetary policies and remains robust after many checks, including those addressing endogeneity. Additionally, heterogeneity analysis reveals further insights: stronger banks—such as larger banks, low-risk banks, and state-owned institutions—experience a more pronounced weakening of the bank lending channel due to digital transformation compared to weaker banks. Originality/value This study is the first to explore how digital transformation within banks affects the interaction between monetary policy and bank lending. In doing so, it adds new insights to the literature on monetary policy transmission and deepens our understanding of the broader effects of digital transformation.