The Great Lockdown: Pandemic response policies and bank lending conditions

This study analyses the effects of monetary and prudential policies taken in response to the outbreak of the coronavirus pandemic to support bank lending conditions. More precisely, we focus on the effects of targeted longer-term refinancing operations (TLTROs) and their interaction with supervisory measures taken in the euro area. For identification, we use proprietary data on participation in central bank liquidity operations, high-frequency reactions to monetary policy announcements, and confidential supervisory information on bank capital requirements. We show that, in the absence of the funding cost relief associated with the pandemic response measures, banks’ ability to supply credit would have been severely affected. The results are robust to controlling for other concomitant policy measures such as government guarantees or quantitative easing. Our findings also indicate that the coordinated intervention by monetary and prudential authorities amplified the effects of the individual measures in supporting liquidity conditions and helping to sustain the flow of credit to the private sector. Finally, we find that, while monetary and prudential policies did not promote “zombie” lending and “zombie” firms, in absence of these measures the pandemic would have led to a significantly larger decline in firms’ employment.