Working Paper: CEPR ID: DP9647
Authors: Lucrezia Reichlin
Abstract: The paper is a narrative on monetary policy and the banking sector during the two recent euro area recessions. It shows that while in the two episodes of recession and financial stress the ECB acted aggressively providing liquidity to banks, the second recession, unlike the first, has been characterized by an abnormal decline of loans with respect to both real economic activity and the monetary aggregates. It conjectures that this fact is explained by the postponement of the adjustment in the banking sector. It shows that euro area banks, over the 2008-2012 period, did not change neither the capital to asset ratio nor the size of their balance sheet relative to GDP keeping them at the pre-crisis level. The paper also describes other aspects of banks? balance sheet adjustment during the two crises pointing to a progressive dismantling of financial integration involving the inter-bank market since the first crisis and the market for government bonds since the second.
Keywords: banks; monetary policy; recession
JEL Codes: E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ECB liquidity provision during the first crisis (E58) | bank lending (G21) |
| ECB liquidity provision during the second crisis (E58) | bank lending (G21) |
| inadequate recapitalization during the first crisis (F65) | vulnerability in the second crisis (H12) |
| vulnerability in the second crisis (H12) | shift in asset composition towards domestic government bonds (G15) |