COVID-19 OUTBREAK: IMPACTS OF BANK DEPOSITS ON BANK LENDING

Abstract

We examine the effect of deposit growth on bank loan growth during COVID-19 in the Western Balkan countries. Our analysis employs a panel dataset comprising bank-level and macroeconomic data from 2012 to 2021, using the fixed effect estimation method. Our main finding is that deposit growth has a significant positive effect on banks’ lending during the pandemic. Drawing on the credit channel of monetary policy transmission, we contextualise these findings within the structural constraints of Western Balkan banking systems and the regulatory forbearance measures including loan repayment moratoria deployed during the pandemic. The results reveal that deposit growth, primarily due to increased savings and government stimulus efforts, led to an increase in banks’ lending activities during the early stages of the pandemic. The results also indicate that the impact is positive and significant during both subperiods: before and during COVID-19. Overall, our findings suggest that fostering deposit growth may be a feasible approach for policymakers to encourage economic recovery during crises. Further, the results provide useful guidance for banks in utilising their liquidity and lending policies.