The transmission of monetary policy to credit supply in the euro area

We present empirical evidence on the transmission of monetary policy to banks’ credit standards (i.e. loan approval criteria) in loans granted to non-financial corporations (NFCs) in the euro area. To this end, we use a confidential survey in which banks are asked about developments in their respective credit markets, coupled with banks’ balance sheets and high-frequency monetary policy shocks. First, we find that poorly capitalized banks are more likely to tighten their credit standards in loans to NFCs. Second, these banks have tended to tighten their credit standards more in loans to SMEs than in loans to large firms during the current restrictive monetary phase. Third, the transmission of monetary policy to credit standards in loans to NFCs is stronger in poorly capitalized banks. Fourth, the relationship between monetary policy and credit standards is driven by large contractionary monetary policy shocks, which reveals important asymmetries in the bank lending channel. Finally, a tightening of the monetary policy stance also increases rejection rates in loans to NFCs, to a greater extent in poorly capitalized banks.