|
|
In response to the financial crisis, the Eurosystem has introduced a number of new policy tools that have expanded the size of the central bank balance sheet. The purpose of these tools was to support the functioning of financial markets and to provide additional stimulus to the economy when the policy rate was constrained near zero. Whereas the literature on the macroeconomic consequences of changes in the policy rate is vast, little is known about the effects of these alternative policy measures to stimulate the flow of credit to the private sector. Even less is known about the transmission mechanism. This paper is an attempt to fill this gap. To do this, we have estimated the effects of credit support policies on lending behavior for a panel of 131 euro area banks using Jordà’s (2005) local projection methods.
In a first step, authors show that such policy measures have been effective in stimulating bank lending to households and firms since the start of the financial crisis. Specifically, an expansion in the Eurosystem’s balance sheet leads to a fall of bank lending rates, and a rise in the volume of lending. In a second step, they investigate the role of different bank characteristics in explaining the pass-through to credit supply. Consistent with the bank lending view, they find that banks that are more constrained to obtain unsecured external funding during the crisis, responded also more to the policy measures. Liquidity policies by the central bank may thus alleviate funding constraints for banks. This is, however, much less the case for banks that have very low levels of capitalization. More precisely, they find that lending activities of banks that are smaller, have less liquid assets, fund themselves less by retail deposits and are less well capitalized respond more to credit support measures. However, these effects are mitigated when a bank’s capital position is weaker. As has been argued by Bernanke and Lown (1991) and Van den Heuvel (2007) for conventional monetary policy, a minimum level of capitalization (imposed by regulation or the market) appears to be a crucial condition for the other channels to be operative, as if capital acts like the ultimate constraint.
The implications of these findings are twofold. First, credit support measures, and the role of the central bank as lender of last resort, are effective to prevent a liquidity-driven credit crunch, but banks need to have a sufficient buffer over their minimum capital requirements to be able to transmit the easier financial conditions to the rest of the economy.
From this perspective, the recent efforts to recapitalise euro area banks should enhance the effectiveness of such policies. Second, this also pleads in favor of countercyclical regulation, including sufficiently high countercyclical capital buffers, in order to avoid that binding capital requirements contribute to an even more severe reduction in credit.