Monetary Policy, macroprudential Policy, and Banking Stability: Evidence from the Euro Area
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.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
- Raghuram G. Rajan, 2005.
"Has financial development made the world riskier?,"
Proceedings - Economic Policy Symposium - Jackson Hole,
Federal Reserve Bank of Kansas City, issue Aug, pages 313-369.
- Olivier J. Blanchard, 2008.
"The State of Macro,"
NBER Working Papers
14259, National Bureau of Economic Research, Inc.
- Manuel Arellano & Stephen Bond, 1991.
"Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,"
Review of Economic Studies,
Oxford University Press, vol. 58(2), pages 277-297.
- Tom Doan, . "RATS program to replicate Arellano-Bond 1991 dynamic panel," Statistical Software Components RTZ00169, Boston College Department of Economics.
- Laeven, Luc & Levine, Ross, 2009.
"Bank governance, regulation and risk taking,"
Journal of Financial Economics,
Elsevier, vol. 93(2), pages 259-275, August.
- Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-55, January.
- Lown, Cara & Morgan, Donald P., 2004.
"The Credit Cycle and the Business Cycle: New Findings Using the Loan Officer Opinion Survey,"
SIFR Research Report Series
27, Institute for Financial Research.
- Lown, Cara & Morgan, Donald P., 2006. "The Credit Cycle and the Business Cycle: New Findings Using the Loan Officer Opinion Survey," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1575-1597, September.
- Matteo Ciccarelli & Angela Maddaloni & Jose Luis Peydro, 2015.
"Trusting the Bankers: A New Look at the Credit Channel of Monetary Policy,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 979-1002, October.
- Matteo Ciccarelli & Angela Maddaloni & Jose Luis Peydro, 2014. "Code and data files for "Trusting the bankers: A new look at the credit channel of monetary policy"," Computer Codes 13-203, Review of Economic Dynamics.
- Ciccarelli, Matteo & Peydró, José-Luis & Maddaloni, Angela, 2010. "Trusting the bankers: a new look at the credit channel of monetary policy," Working Paper Series 1228, European Central Bank.
- Gabriel Jimenez & Steven Ongena & Jose-Luis Peydro & Jesus Saurina, 2012. "Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications," American Economic Review, American Economic Association, vol. 102(5), pages 2301-26, August.
- Máximo Camacho & Gabriel Pérez-Quirós & Lorena Saiz, 2005.
"Do european business cycles look like one?,"
0518, Banco de España;Working Papers Homepage.
- Bengt Holmström & Jean Tirole, 2011.
"Inside and Outside Liquidity,"
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262015781, December.
- Arellano, Manuel, 2003. "Panel Data Econometrics," OUP Catalogue, Oxford University Press, number 9780199245291, December.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009.
"Varieties of Crises and Their Dates,"
in: This Time Is Different: Eight Centuries of Financial Folly
Princeton University Press.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, number 8973, 01-2013.
- Valencia, Fabián, 2014.
"Monetary policy, bank leverage, and financial stability,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 47(C), pages 20-38.
- Fabian Valencia, 2011. "Monetary Policy, Bank Leverage, and Financial Stability," IMF Working Papers 11/244, International Monetary Fund.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Barth,James R. & Caprio,Gerard & Levine,Ross, 2006.
"Rethinking Bank Regulation,"
Cambridge University Press, number 9780521855761, November.
- Douglas W. Diamond & Raghuram Rajan, 2011.
"Illiquid Banks, Financial Stability, and Interest Rate Policy,"
NBER Working Papers
16994, National Bureau of Economic Research, Inc.
- Douglas W. Diamond & Raghuram G. Rajan, 2012. "Illiquid Banks, Financial Stability, and Interest Rate Policy," Journal of Political Economy, University of Chicago Press, vol. 120(3), pages 552 - 591.
- John B. Taylor, 2007.
"Housing and Monetary Policy,"
NBER Working Papers
13682, National Bureau of Economic Research, Inc.
- John B. Taylor, 2007. "Housing and monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 463-476.
- Douglas W. Diamond & Raghuram G. Rajan, 2006.
"Money in a Theory of Banking,"
American Economic Review,
American Economic Association, vol. 96(1), pages 30-53, March.
- Maddaloni, Angela & Peydró, José-Luis, 2010.
"Bank risk-taking, securitization, supervision and low interest rates: Evidence from the euro area and the U.S. lending standards,"
Working Paper Series
1248, European Central Bank.
- Angela Maddaloni & Jose-Luis Peydro, 2011. "Bank Risk-taking, Securitization, Supervision, and Low Interest Rates: Evidence from the Euro-area and the U.S. Lending Standards," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2121-2165.
- Jesper Berg & Annalisa Ferrando & Gabe de Bondt & Silvia Scopel, 2005. "The bank lending survey for the euro area," Occasional Paper Series 23, European Central Bank.
- Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
- Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
- Martin Ruckes, 2004. "Bank Competition and Credit Standards," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 1073-1102.
- Claudio Borio & Haibin Zhu, 2008.
"Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism?,"
BIS Working Papers
268, Bank for International Settlements.
- Borio, Claudio & Zhu, Haibin, 2012. "Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism?," Journal of Financial Stability, Elsevier, vol. 8(4), pages 236-251.
When requesting a correction, please mention this item's handle: RePEc:ijc:ijcjou:y:2013:q:1:a:6. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Timo Laurmaa)
If references are entirely missing, you can add them using this form.