Unconventional Monetary Policy and Bank Lending Relationships

Abstract

We explore how banks transmit central bank liquidity injections using unique variation in the ECB's 2011-12 Very Long-Term Refinancing Operations (VLTROs) which affected lending to firms discontinuously across credit ratings (i.e., within banks). We show that banks transmit liquidity differently to multi-bank firms than to firms with only one bank. Single-bank firms receive longer-term relationship lending and increase investment, while multi-bank firms receive short-term transactions-style lending only. Policy effects are attributable to increasing the maturity of bank borrowing from the ECB in combination with allowing banks to use loans to firms as collateral for such borrowing.

Policy uncertainty, lender of last resort and the real economy

“…This paper complements existing work on the effect of central bank policies related to the vLTRO. Existing papers focus on the vLTRO liquidity uptake (Andrade et al, 2018) or on the relaxation of the collateral rules concomitant with the vLTRO (e.g., Cahn et al, 2018;van Bekkum et al, 2018;Carpinelli and Crosignani, 2018) and provide evidence of its effect on the lending in a number of countries. 8 We show that the lengthening of the maturity of central bank liquidity can affect bank lending independently of the relaxation of the collateral rules.…”

“…Carpinelli and Crosignani (2018) explore the introduction of a regulatory intervention by the Italian government that allowed banks to "manufacture" collateral by guaranteeing securities, such as retained bank own bonds, otherwise ineligible at the ECB. Andrade et al (2018) studies the impact of the endogenous vLTRO liquidity uptake in France, while Cahn et al (2018) exploit the concurrent relaxation of the collateral rules for French banks. 9 In Section 1, we provide detailed evidence of the negligible role played by these newly eligible securities in the pledging of Portuguese banks during the vLTRO.…”

Sticky Deposit Rates and Allocative Effects of Monetary Policy

“…The latter assigns credit ratings to all French nonfinancial companies with at least three subsequent years of accounting data. The main use of the ratings is to determine the eligibility of bank loans to rated firms as collateral for Eurosystem funding (see Cahn, Duquerroy, and Mullins (2019) for more details). The rating is an assessment of firms' ability to meet their financial commitments over a three-year horizon.…”

“…11 We test this hypothesis more formally by computing the proportion of loans accruing to risky firms. To do so, we exploit the credit ratings assigned by the Banque de France, and consider a firm to be "risky" if it receives a rating worse than 4, which used to be the minimum rating required for a firm's loans to be eligible as collateral for the ECB (Cahn, Duquerroy, and Mullins (2019)). One drawback of this measure is that the Banque de France provides credit ratings only for large firms with balance-sheet information, so we need to limit the denominator of the dependent variable to said large firms.…”

The impact of credit availability on small and medium companies

“…Banks behave differently towards mature entities in the competitive marketthey charge a lower fee for a credit. It also explains why mature enterprises in an uncompetitive banking market finance investments basing rather on internal sources of finance than banking, and how banks adjust their corporate lending portfolio (Cahn, Christophe et al, 2017;Belás et al, 2017;Rajnoha et al, 2017;Davydenko et al, 2017). That is why the determinant of widely-understood credit availability for enterprises is the level of competition in the market of banking services.…”