10 February 2017

ECB: Inside asset purchase programs: the effects of unconventional policy on banking competition

Authors test if unconventional monetary policy instruments influence the competitive conduct of banks. Using detailed security holdings data at the bank level, they show that banks exposed to this unexpected (loose) policy shock mildly gained local loan and deposit market shares.

To ensure the transmission of monetary policy and restore the smooth functioning of selected financial market segments after the Great Financial Crisis of 2007/2008, the European Central Bank (ECB) complemented conventional monetary policy with a range of less conventional policy instruments. The use of these policy instruments continues to raise controversial debates among policy makers, politicians, and academics alike.

Especially the effects for banking competition remain unchartered, which is remarkable given the efforts to ensure a level-playing field in an integrated European Banking Market. Asset purchase programs might entail a differential treatment of market participants and thereby competitive effects. First, banks that held assets that were subject to a surprise purchase by the ECB could convert more risky assets into cash at higher prices (duration risk channel). Second, even if banks continued to hold these assets, positive price effects due to the additional demand by the ECB would result in higher portfolio values and thus excess reserves (capital relief channel), which constitute comparative advantages in loan and deposit markets relative to competitors without such access.

Authors combine micro data on purchases under the Securities Markets Program (SMP) by the ECB and detailed security holdings of all German banks. Between May 2010 and September 2012, the ECB purchased selected government bonds from Greece, Italy, Ireland, Portugal, and Spain on the order of 210 billion Euros. They match the quarterly holdings of all securities of all 1,700 or so German banks ISIN-by-ISIN to the SMP purchases to test if banks with SMP-security exposure gained market shares. To ensure a valid comparison of banks to identify any differential effects, they focus on small regional banks that held SMP securities and compare them to a matched sample of other regional banks based on observable financial account traits.

Their results indicate a robust effect of SMP exposure on regional market shares in terms of loans, deposits, and gross total assets. Banks with SMP exposure exhibit around 70 basis points higher market shares, which represents mild economic magnitudes given average regional markets shares on the order of 22 percentage points. At the same time, this result provides evidence of existing side effects of unconventional policies, in this case the restoration of monetary transmission in the Eurozone periphery having effects on banking competition in regional banking markets of Germany. Authors also show that lending growth of SMP banks is significantly faster compared to non-SMP banks whereas deposit and overall asset growth is not. Moreover, their findings appear to be driven mostly by those local banks that actually expanded their portfolio shares of SMP securities over the spell of the program and held the largest relative volumes of SMP securities compared to total portfolio size. This result indicates that at least German banks did not conduct any outright unloading of Eurozone periphery sovereign debt at the ECB in response to the SMP. They also document an amplification effect of the policy on local market shares for those banks that held other periphery securities that were not part of the SMP.

Full working paper

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