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ECB-1: Interaction of monetary and macroprudential policies, impact of regulations and spillover across the financial sector
Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation
1University of Illinois, Urbana-Champaign; 2University of Michigan; 3Columbia University
We quantify the impact of bank market power on the pass-through of monetary policy to borrowers. To this end, we estimate a dynamic banking model in which monetary tightening increases banks' funding costs. Given their market power, banks optimally choose how much of a rate increase to pass on to borrowers. In the model, banks are subject to capital and reserve regulations, which also influence the degree of pass-through. Compared with the conventional regulation-based channels, we find that in the two most recent decades, bank market power explains a significant portion of monetary transmission. The quantitative effect is comparable in magnitude to the bank capital channel. In addition, the market power channel interacts with the bank capital channel, and this interaction can reverse the effect of monetary policy when the Federal Funds rate is low.
Inspecting the Mechanism of Quantitative Easing in the Euro Area
1Universite du Luxembourg, Luxembourg; 2Chicago Booth Business School; 3Princeton University; 4Banque de France
Using new security-level portfolio holdings data in the euro area by country and investor type, we study how investors rebalance in response to the European Central Bank’s (ECB) purchase programme that started in March 2015. To quantify changes in risk concentration, we estimate the evolution of the distribution of duration, sovereign, and corporate credit risk exposures across investors and geographies. We find that 70% of ECB purchases are sold by the foreign sector and that risk mismatch, if anything, reduces. We use an instrumental variables estimator to show that the average impact on yields was -13bp. We connect the portfolio rebalancing and price effects by estimating a sector-level asset demand system for government debt.
Banking Supervision, Monetary Policy and Risk-Taking: Big Data Evidence from 15 Credit Registers
1ECB; 2ICREA-Universitat Pompeu Fabra; 3CREI; 4Barcelona GSE; 5Imperial College London; 6CEPR
We analyse the role of banking supervision for banks’ risk-taking behaviour, and its interactions with monetary policy. We exploit a new, proprietary dataset based on 15 European credit registers, in conjunction with the centralization of bank supervision for some banks at the supranational level, over a period of unprecedented monetary policy action. We find that: (1) banks with higher ex-ante non-performing loans (NPL) supply more credit toward riskier firms, with identical effects for banks headquartered in stressed and non-stressed countries. Results are identical to considering a measure of NPL that excludes the borrower’s industry, and also to the inclusion of a large set of controls, such as borrower-lending matching and time-varying unobserved borrower and lender fundamentals that explain 70 p.p. of the R-squared, thereby suggesting strong exogeneity of our results to credit demand and other bank characteristics; (2) For banks operating in stressed countries only, centralized supervision compresses lending to riskier firms, although by a smaller extent for banks with higher NPL. Effects are similar if we include only banks around the threshold of eligibility for centralized supervision, and effects are only significant after the centralization of supervision; (3) Monetary policy easing increases bank risk-taking, but– only in stressed countries– this is partly offset by centralized supervision, with weaker effects for banks with higher NPLs. Overall, results show that leveraging on multiple credit registers –as done in this paper for the first time– is crucial for analysing heterogeneous effects and for the external validity.
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