Whereas the balance sheet channel focuses on the availability and value of collateral necessary for borrowing operations, the bank lending channel refers to changes in the banks’ and borrowers’ funding possibilities. Usually, two reasons are put forward why the balance sheet channel has weakened of late. Banks have become more flexible because of the growing use of securitisation and improvements in risk management.
Consequently, banks can respond more flexibly to changes in financial market conditions and will therefore not pass through each and every change in the central bank’s official short-term interest rate. Hence, other things being equal, the effect of monetary policy on the overall loan supply has decreased.