Working Paper: NBER ID: w26479
Authors: Viral V. Acharya; Bjrn Imbierowicz; Sascha Steffen; Daniel Teichmann
Abstract: We investigate the transmission of central bank liquidity to bank deposits and loan spreads in Europe over the period from January 2006 to June 2010. We find evidence consistent with an impaired transmission channel due to bank risk. Central bank liquidity does not translate into lower loan spreads for high-risk banks for maturities beyond one year, even as it lowers deposit spreads for both high-risk and low-risk banks. This adversely affects the balance sheets of high-risk bank borrowers, leading to lower payouts, capital expenditures and employment. Overall, our results suggest that banks’ capital constraints at the time of an easing of monetary policy pose a challenge to the effectiveness of the bank-lending channel and the central bank's lender-of-last-resort function.
Keywords: Monetary Policy; Banking; Liquidity; Financial Stability
JEL Codes: E43; E58; G01; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Impaired transmission of monetary policy through high-risk banks (E44) | Adverse real economic consequences (F69) |
| Central bank liquidity (E58) | Differential impact on low-risk vs high-risk banks' deposit spreads (G21) |
| Central bank liquidity (E58) | Differential impact on low-risk vs high-risk banks' loan spreads (G21) |
| Central bank liquidity (E58) | Deposit spreads (G21) |
| Central bank liquidity (E58) | Loan spreads (G51) |