05 September 2019

Working paper: ECB corporate QE and the loan supply to bank-dependent firms

Using a representative sample of businesses in the euro area, authors show that Eurosystem purchases of corporate bonds under the Corporate Sector Purchase programme (CSPP) increased the net issuance of debt securities, triggering a shift in bank loan supply in favour of firms that do not have access to bond-based financing.

Compared to traditional interest rate policy, the impact of unconventional monetary policy is much less understood. This applies in particular to the following addition to the unconventional toolkit: out right purchases of corporate bonds. It was only in March 2016 that the European Central Bank (ECB) announced such a programme. In this paper, we examine the transmission mechanism of what is potentially a valuable tool also for other central banks.

The goal of the ECB Corporate Sector Purchase Programme (CSPP) is to ease financing conditions in the real economy and to stimulate the provision of new credit. The rationale is that the presence of a new and large actor in both primary and secondary markets facilitates the issuance of corporate bonds. In broad terms, the CSPP is a quantitative easing (QE) programme, which consists of outright purchases by the Eurosystem of investment-grade euro denominated bonds issued by non-bank corporations (i.e. non-financial corporations (NFCs) and insurance corporations) established in the euro area. Literature on the CSPP focused so far on its effects on the bond market, showing a tightening of corporate bond spreads and an increase in net bond issuance following the announcement of CSPP.

In this paper, authors go one step further and ask whether the CSPP also benefited firms that themselves do not issue corporate bonds. The idea is that CSPP creates spare capacity in banks’ balance sheets that they can use to lend to bank-dependent firms. Two mechanisms come to mind as to how this may occur:

• First, large corporations can issue bonds more easily with a new important actor in both the primary and the secondary markets. These firms substitute bank loans with relatively cheaper corporate bonds.
• Second, ECB activity in secondary markets may prompt banks to sell some of the corporate bonds they hold on their balance sheets, thereby also generating balance sheet capacity.

To examine spill-overs from CSPP authors employ two distinct, but complementary empirical strategies. The first set of exercises relates the purchase flows associated with the policies of the March 2016 package with credit supply. They then go one step further and provide an accurate representation of the causal chain from activity in the syndicated loan market via banks to bank-dependent firms.

In particular, they combine Dealogic data on loan syndications with data on ECB purchases at the ISIN level to understand which banks experienced a negative shock in the syndicated loan market. They manually match this information with a confidential dataset provided by Bureau van Dijk that links SAFE respondents to their banks.

The empirical evidence supports the conclusion that the programme made a positive contribution to the provision of financing to bank-dependent firms, including SMEs. Authors find that the magnitude of CSPP flows to be significantly associated with their measures of credit supply.

In contrast, the flows associated with the other monetary policy instruments appear to have produced effects through different channels. The data are consistent with the notion that the CSPP stimulated net corporate bond issuance, and that reduced loan demand from corporates active in the bond markets creates spare capacity in bank balance sheets. While this spare capacity could also result from banks selling some of their holdings of corporate bonds, the evidence does not support the empirical salience of this channel. The results hold also when they trace the CSPP impact through firm-bank linkages. It turns out that firms that ex-ante have a relationship with a bank subject to lower demand for syndicated loans are more likely to report improved access to credit post CSPP.

Authors subject the results to several robustness tests. In particular, they show that a placebo treatment coinciding with the implementation of the first TLTRO in September 2014 and the announcement of PSPP in January 2015 cannot account for their results.

Full working paper on ECB

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