We estimate the effects of exogenous innovations to the balance sheet of the ECB since the start of the financial crisis within a structural VAR framework. An expansionary balance sheet shock stimulates bank lending, reduces interest rate spreads, leads to a depreciation of the euro, and has a positive impact on economic activity and inflation. A counterfactual analysis reveals that the macroeconomic consequences of the balance sheet policies in the aftermath of the crisis have been substantial. For example, euro-area output and inflation would have been more than 1 percent lower in 2012 without the threeyear LTRO programs. Finally, we find that the effects on output turn out to be smaller in the member countries that have been more affected by the financial crisis, in particular those countries where the banking system is less well capitalized.
We use an original monthly dataset of 131 individual euro area banks to examine the effectiveness and transmission mechanism of the Eurosystem's credit support policies since the start of the crisis. First, we show that these policies have indeed been succesful in stimulating the credit flow of banks to the private sector. Second, we find support for the "bank lending view" of monetary transmission. Specifically, the policies have had a greater impact on loan supply of banks that are more constrained to obtain unsecured external funding, i.e. small banks (size effect), banks with less liquid balance sheets (liquidity effect), banks that depend more on wholesale funding (retail effect) and low-capitalized banks (capital effect). The role of bank capital is, however, ambiguous. Besides the above favorable direct effect on loan supply, lower levels of bank capitalization at the same time mitigate the size, retail and liquidity effects of the policies. The drag on the other channels has even been dominant during the sample period, i.e. better capitalized banks have on average responded more to the credit support policies of the Eurosystem as a result of more favourable size, retail and liquidity effects.
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