ARE ASSET SIZE AND CAPITAL STRENGTH MATTERS IN

This paper attempts to prove the role of asset size and capital strength to the monetary shock on bank lending channel in Malaysia. Basically, undercapitalized banks (of any size) tend to respond more to change in policy rather than well capitalized. Besides that, some smaller banks hold less liquid assets which they can’t use to offset monetary shock. However, most of large banks easily shield their operation from the monetary stance. Therefore, by using panel data of 25 commercial banks in Malaysia from 1997 to 2004 this paper tries to prove whether both variables play an important role in the monetary shock on the bank lending channel. We assume that asset size and capital ratio as controlled variables that have been included in the model. Generalize Least Squares method on the Fixed Effects has been chosen as the estimation method. The findings show that there exists a bank lending channel in Malaysia. Unfortunately, we failed to prove the size of asset and capital ratio play important role to the changes in monetary policy