Bank Earnings Management and the Effectiveness of Monetary Policy Transmission

Banking systems are pivotal in transmitting monetary policy to the real economy.The banking literature has devoted significant attention to understanding this process, mainly through the lens of the bank lending channel, which focuses on how monetary policy influences bank loan supply.This study investigates the influence of bank earnings management on the bank lending channel within the framework of monetary policy transmission.We collect accounting data from 31 Vietnamese commercial banks for the period 2007-2019 to perform the analysis.In line with the literature, we employ discretionary loan loss provisions as a proxy for bank earnings management.To effectively address potential endogeneity and highlight the persistent nature of bank lending, we employ the generalized method of moments (GMM) for regressions in dynamic panel models.The study reveals a negative association between increased earnings manipulations within the banking system and the strength of the bank lending channel.This result remains consistent across scenarios where the central bank utilizes both interest ratebased and quantitative-based tools for monetary policy implementation.Our results underscore the crucial policy implication that transparent financial reporting plays a pivotal role in enhancing the efficacy of the banking system in the context of monetary policy transmission.