The transmission mechanism of monetary policy in West African Economic and Monetary Union (WAEMU): evidence from bank balance' sheet

The objective of this research is to assess the effect of holding government securities on the credit channel, taking into account the heterogeneity of WAEMU banks' balance sheets. The methodology adopted to achieve this objective is VAR panel modelling, proposed by Abrigo and Love. The generalized moment method was applied to a sample of 95 commercial banks operating in the WAEMU covering the period 2000-2019. The main results show that a strong presence of government securities in banks' balance sheets contributes to the reinforcement of the financial crowding-out effect in the WAEMU. This crowding-out effect differs from one category of bank to another. Indeed, the negative relationship between government securities and the credit channel is more pronounced among large banks, national banks and pan-African banks, in contrast to other bank categories in this Union. The results also point to an asymmetrical effect of monetary policy on the lending behaviour of WAEMU banks to private borrowers. However, the WAEMU monetary authorities should step up supervision of banks that hold a large proportion of sovereign debt on their balance sheets. The high proportion of sovereign debt on banks' balance sheets creates situations of interdependence. This could have negative consequences on the solvency of banks and therefore on the stability of the banking system in the Union. The aim of this research is to strengthen the existing literature on the transmission mechanisms of monetary policy. This research involves several players in the economic sphere: the Central Bank, commercial banks, WAEMU member states and the private sector (businesses and households). Indeed, it will attempt to provide a solution to the monetary authorities and regulators of the WAEMU area, by contributing to the effort to develop the public securities market and improve the financing of the economies of the Union's countries.