Did Interest Rates at the Zero Lower Bound Affect Lending of Commercial Banks? Evidence for the Euro Area

Abstract

The paper examines the bank lending activities of banks in a low interest rate environ-ment. External financing of small-and medium-sized enterprises in the euro area primari-ly takes place via bank loans and not through capital markets. Based on the Bankscope database, bank balance sheet data is utilized. Control variables are included, such as for the system of banking regulation. The panel estimation includes 706 banks from 15 Euro area member states and is conducted for the period 2000 to 2015. All models show a significant positive impact of lower interest rates on net lending. In particular, the results do not indicate that credit is restricted if interest rates move towards the zero-lower bound. JEL-Classification: E44, E51, E52 AbstractThe paper examines the bank lending activities of banks in a low interest rate environment. External financing of small-and medium-sized enterprises in the euro area primarily takes place via bank loans and not through capital markets. Based on the Bankscope database, bank balance sheet data is utilized. Control variables are included, such as for the system of banking regulation. The panel estimation includes 706 banks from 15 Euro area member states and is conducted for the period 2000 to 2015. All models show a significant positive impact of lower interest rates on net lending. In particular, the results do not indicate that credit is restricted if interest rates move towards the zero-lower bound. JEL-Codes: E44, E51, E52 Keywords:Bank lending, banking regulation, monetary transmission mechanisms, low interest rate environmentBelke (corresponding author): Ad personam Jean Monnet Professor, University of Duisburg-Essen, ansgar.belke@uni-due.de, Dreger: cdreger@diw.de. We would like to thank the Wissenschaftsförderung der Sparkassen-Finanzgruppe e. V. for financial support.