The transmission mechanism of credit support policies in the euro area

We use an original monthly dataset of 131 banks to examine the effectiveness and transmission mechanism of the Eurosystem’s credit support policies in the wake of the banking and sovereign debt crisis. First, we show that these policies were indeed succesful in stimulating the credit flow of banks to the private sector. Second, we find support for the “bank lending view” of monetary transmission. Specifically, the policies had a greater impact on loan supply of banks that were more constrained to obtain unsecured external funding, i.e. small banks (size effect), banks with less liquid balance sheets (liquidity effect), banks that depended more on wholesale funding (retail effect) and low-capitalized banks (capital effect). The role of bank capital was, however, ambiguous. Besides the above favorable direct effect on loan supply, lower levels of bank capitalization at the same time mitigated the size, retail and liquidity effects of the policies. The drag on the other channels was even dominant, i.e. better capitalized banks responded on average more to the credit support policies of the Eurosystem as a result of more favourable size, retail and liquidity effects.