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Monetary Policy, macroprudential Policy, and Banking Stability: Evidence from the Euro Area

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  • Angela Maddalonia

    (European Central Bank)

  • Jose-Luis Peydro

    (Universitat Pompeu Fabra and Barcelona GSE)

Abstract

We analyze the impact on lending standards of monetary policy rates and macroprudential policy before the 2008 crisis, and of monetary rates and long-term public liquidity during the crisis. Exploiting the euro-area institutional setting for monetary and prudential policy and using the Bank Lending Survey, we find robust evidence that low monetary policy interest rates soften lending conditions unrelated to borrowers’ risk in the period prior to the crisis, and some suggestive evidence of excessive risk-taking due to low interest rates for mortgage loans. Moreover, the impact of low monetary policy rates on the softening of standards is reduced by more stringent prudential policy on either bank capital or loan-to-value ratio. After the start of the 2008 crisis, we find that low monetary rates soften lending conditions that were tightened because of bank capital and liquidity constraints, especially for business loans. Importantly, this softening effect is stronger for banks that borrow more long-term liquidity from the Eurosystem. Therefore, the results suggest that monetary policy rates and public provision of long-term liquidity complement each other in reducing a credit crunch for firms.

Suggested Citation

  • Angela Maddalonia & Jose-Luis Peydro, 2013. "Monetary Policy, macroprudential Policy, and Banking Stability: Evidence from the Euro Area," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 121-169, March.
  • Handle: RePEc:ijc:ijcjou:y:2013:q:1:a:6
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    Cited by:

    1. Duchi, Fabio & Elbourne, Adam, 2016. "Credit supply shocks in the Netherlands," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 51-71.
    2. Beyer, Andreas & Nicoletti, Giulio & Papadopoulou, Niki & Papsdorf, Patrick & Rünstler, Gerhard & Schwarz, Claudia & Sousa, João & Vergote, Olivier, 2017. "The transmission channels of monetary, macro- and microprudential policies and their interrelations," Occasional Paper Series 191, European Central Bank.
    3. Sylvia Kaufmann & Johann Scharler, 2013. "Bank-Lending Standards, Loan Growth and the Business Cycle in the Euro Area," Working Papers 2013-34, Faculty of Economics and Statistics, University of Innsbruck.
    4. Kiyotaka Nakashima & Masahiko Shibamoto & Koji Takahashi, 2017. "Risk-Taking Channel of Unconventional Monetary Policies in Bank Lending," Discussion Paper Series DP2017-24, Research Institute for Economics & Business Administration, Kobe University.
    5. Arito Ono & Hirofumi Uchida & Gregory Udell & Iichiro Uesugi, "undated". "Lending Pro-Cyclicality and Macro-Prudential Policy: Evidence from Japanese LTV Ratios," Working Papers e70, Tokyo Center for Economic Research.
    6. Bassett, William F. & Chosak, Mary Beth & Driscoll, John C. & Zakrajšek, Egon, 2014. "Changes in bank lending standards and the macroeconomy," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 23-40.
    7. Malovaná, Simona & Frait, Jan, 2017. "Monetary policy and macroprudential policy: Rivals or teammates?," Journal of Financial Stability, Elsevier, vol. 32(C), pages 1-16.
    8. Adrian Babin, 2015. "Home-Host Banking Issues and Non-Core Funding—Evidence from Central and Eastern Europe," Open Economies Review, Springer, vol. 26(3), pages 447-477, July.
    9. Andrea Nobili & Andrea Orame, 2015. "Estimating the effects of a credit supply restriction: is there a bias in the Bank Lending Survey?," Questioni di Economia e Finanza (Occasional Papers) 266, Bank of Italy, Economic Research and International Relations Area.
    10. Michele Piffer, 2016. "Monetary Policy and Defaults in the US," Discussion Papers of DIW Berlin 1559, DIW Berlin, German Institute for Economic Research.
    11. Oriol Carreras & E Philip Davis & Rebecca Piggott, 2016. "Macroprudential tools, transmission and modelling," National Institute of Economic and Social Research (NIESR) Discussion Papers 470, National Institute of Economic and Social Research.
    12. Piotr Cizkowicz & Andrzej Rzonca & Andrzej Toroj, 2015. "In search for appropriate lower bound.Zero lower bound vs. positive lower bound under discretion and commitment," NBP Working Papers 215, Narodowy Bank Polski, Economic Research Department.
    13. Itai Agur & Maria Demertzis, 2015. "Will Macroprudential Policy Counteract Monetary Policy’s Effects on Financial Stability?," IMF Working Papers 15/283, International Monetary Fund.
    14. Thierry Tressel & Yuanyan S Zhang, 2016. "Effectiveness and Channels of Macroprudential Instruments; Lessons from the Euro Area," IMF Working Papers 16/4, International Monetary Fund.
    15. Dimitri O. Ledenyov & Viktor O. Ledenyov, 2013. "On the accurate characterization of business cycles in nonlinear dynamic financial and economic systems," Papers 1304.4807, arXiv.org.
    16. Scopel, Silvia & Hempell, Hannah S. & Köhler-Ulbrich, Petra, 2016. "The euro area bank lending survey," Occasional Paper Series 179, European Central Bank.
    17. repec:prs:ecstat:estat_0336-1454_2017_num_494_1_10781 is not listed on IDEAS
    18. Khosravi, Taha, 2015. "The Impact of a Low Interest Rate Environment: Empirical Evidence from the Euro Area Bank Lending Survey," MPRA Paper 67363, University Library of Munich, Germany.
    19. Martien Lamers & Frederik Mergaerts & Elien Meuleman & Rudi Vander Vennet, 2016. "The trade-off between monetary policy and bank stability," Working Paper Research 308, National Bank of Belgium.
    20. van Holle, Frederiek, 2017. "Essays in empirical finance and monetary policy," Other publications TiSEM 30d11a4b-7bc9-4c81-ad24-5, Tilburg University, School of Economics and Management.
    21. Ono, Arito & Uchida, Hirofumi & Udell, Gregory F. & Uesugi, Iichiro, 2016. "Lending Pro-Cyclicality and Macro-Prudential Policy: Evidence from Japanese LTV Ratios," HIT-REFINED Working Paper Series 41, Institute of Economic Research, Hitotsubashi University.

    More about this item

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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