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Quantitative easing, accounting and prudential frameworks, and bank lending

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  • Orame, Andrea
  • Ramcharan, Rodney
  • Robatto, Roberto

Abstract

We study whether regulation that relies on historical cost accounting (HCA) rather than mark-to-market accounting (MMA) to insulate banks’ net worth from financial market volatility affects the transmission of quantitative easing (QE) through the bank lending channel. Using detailed supervisory data from Italian banks and taking advantage of a change in accounting rules, we find that HCA makes banks significantly less responsive to QE than MMA. Hence, while HCA can insulate banks’ balance sheets during periods of distress, it also weakens the effectiveness of unconventional monetary policy in reducing firms’ credit constraints through the bank lending channel. JEL Classification: G28, E52, M48

Suggested Citation

  • Orame, Andrea & Ramcharan, Rodney & Robatto, Roberto, 2023. "Quantitative easing, accounting and prudential frameworks, and bank lending," ESRB Working Paper Series 144, European Systemic Risk Board.
    • Handle: RePEc:srk:srkwps:2023144
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    File URL: https://www.esrb.europa.eu//pub/pdf/wp/esrb.wp144.en.pdf
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    More about this item

    Keywords

    bank lending channel; historical cost accounting; regulatory capital; sovereign default premia; unconventional monetary policy;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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