Working Paper: CEPR ID: DP17056
Authors: Christian Bittner; Diana Bonfim; Florian Heider; Farzad Saidi; Carla Sofia Caeiro Soares; Glenn Schepens
Abstract: This paper studies how banks' balance sheets and funding costs interact in the transmission of monetary-policy rates to banks' credit supply to firms. To do so, we use credit-registry data from Germany and Portugal together with the European Central Bank's policy-rate cuts in mid-2014. The pass-through of the rate cuts to banks' funding costs differs across the euro-area currency union because deposit rates vary in their distance to the zero lower bound (ZLB). When the distance is shorter, banks' financing constraints matter less for the supply of credit and there is more risk taking. To rationalize these findings, we provide a simple model of an augmented bank balance-sheet channel where in addition to costly external financing, there is screening of borrowers and a ZLB on retail deposit rates. An impaired pass-through of monetary policy to banks' funding costs reduces their ability to lever up and weakens their lending standards.
Keywords: transmission of monetary policy; bank lending; bank risk taking; bank balance sheets; euro area heterogeneity
JEL Codes: E44; E52; E58; E63; F45; G20; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lower policy rate (E43) | Reduced banks' cost of funding (G21) |
| Reduced banks' cost of funding (G21) | More profitable loans (G51) |
| More profitable loans (G51) | Incentivizes banks to expand credit supply (E51) |
| Lower policy rate (E43) | Improved quality of banks' balance sheets (G21) |
| Improved quality of banks' balance sheets (G21) | Banks can lever up more effectively (G21) |
| Strong passthrough of rate cuts to funding costs (G21) | Banks with higher equity-to-assets ratios expand credit supply more significantly (E51) |
| Weak passthrough of monetary policy (E49) | Muted credit supply responses (E51) |
| Weak passthrough of monetary policy to banks' funding costs (E52) | Increased risk-taking by banks (G21) |
| Increased risk-taking by banks (G21) | Establishment of more new lending relationships with riskier firms (G21) |
| Tighter financing constraints faced by banks (G21) | Reduced marginal benefit of maintaining high lending standards (G21) |
| Economic environment influences unobserved credit demand by firms (H32) | Complicates interpretation of empirical results as causal effects (C31) |