The Eurosystem's large-scale asset purchases (quantitative easing, QE) have resulted in huge

excess liquidity holdings within the euro area banking sector. Until 2015, the banking sector

faced a structural liquidity deficit that could only be covered by borrowing from the Eurosystem, meaning that the banking sector had to rely on central bank credits to meet cash withdrawals and reserve requirements. Since 2015, however, the banking sector has experienced a structural liquidity surplus due to the Eurosystem's massive asset purchases. This means that banks no longer need to borrow from the central bank to cover their liquidity needs. With the start of the interest rate hikes in 2022, the Eurosystem recorded significant losses, while commercial banks benefitted from high interest earnings, as the central bank have had to pay substantial interest on the commercial banks' liquidity holdings. Against this background, the aim of this paper is twofold. First, using a simple theoretical model of a banking sector, it examines how different monetary policy instruments affect commercial banks' credit supply in an environment of structural liquidity surplus. Second, within this model framework, it analyzes whether (a) increasing reserve requirements or (b) introducing a two-tier remuneration system for excess liquidity are effective measures to mitigate central bank losses. We conduct this analysis for a homogeneous banking sector and for a heterogeneous one, where excess liquidity is unevenly distributed across banks. We find that the interest rate applied to required reserves is crucial for the impact of different monetary policy instruments on the supply of bank credit, and that instruments may have a different impact than in times when banks face a structural deficit, and that banks are affected differently. Furthermore, our findings suggest that particularly a two-tier remuneration system can be an appropriate tool for reducing central bank losses.

Cooperman et al. (2023) suggest that the covariance of banks’ funding costs and credit line drawdowns is debt overhang cost to the bank’s equity holders. In this paper, we start from this important result and study whether central banks’ quantitative easing can mitigate this cost. We focus on the COVID-19 shock. We find that funding costs generate frictions related to banks’ shareholders (debt overhang cost), and banks transfer that cost to the credit lines’ prices. Finally, our econometric analysis, event studies, and theory suggest and formalise why central banks’ quantitative easing (QE) is important to mitigate that cost, thereby ensuring a cheaper supply of credit to the economy. Our findings shed further light on the intricate relationship between banks’ funding costs and related debt overhang (Andersen et al. 2019), focusing on an important source of credit for firms: credit lines.

We document the geographical and sectoral specialization of banks’ lending activities using comprehensive data on the universe of loans to corporate borrowers in Spain. Our analysis highlights how specific sources of specialization are more relevant for evaluating different types of borrowers. Specifically, loans to micro and small firms exhibit reduced probabilities of non-performance in geographical markets where banks specialize, whereas loans to medium and large firms experience lower non-performance in sectors in which banks specialize. Crucially, we provide the first evidence of a direct link between bank specialization and enhanced banks’ private information by leveraging confidential data on banks’ private risk assessments reported to regulators. We corroborate our findings by analyzing the relevance of relationship lending, a well-established proxy for firm-specific private information.

hile Chinese banks have become the top cross-border lender to EMDEs, their expansion has slowed recently, both in terms of volume and market share. Also, the strong correlation of China’s bilateral trade and its banks’ cross-border lending has weakened, while during 2020-22 lending became more positively correlated with FDI. In our paper, we analyse these patterns and we explore the role of borrower risk variables and foreign policies. Our findings show that, although the shifting correlation from trade to FDI is a general EMDE phenomenon, China’s Belt and Road Initiative reinforces it. By contrast, borrowers that potentially benefit from geoeconomic fragmentation do not display stronger FDI-lending relationships. We also find

that Chinese banks exhibit different levels of risk tolerance relative to other bank nationalities as borrower country risk variables are positively correlated with Chinese banks’ market shares, but not with their amounts of cross-border lending.