Unconventional Monetary Policy, Bank Lending, and Security Holdings: The Yield-Induced Portfolio Rebalancing Channel

Abstract

Unconventional monetary policy measures in the Eurozone seem to have led to a compression of bond yields that was stronger than the decrease of interest rates on newly issued loans charged by banks in Germany. Furthermore, the volume of credit has increased in relation to security holdings of German banks. This paper examines whether the change in the relative price between bonds and credit resulted in a rebalancing of banks between the securities and credit portfolio. ContributionThis paper uses a fully anonymized dataset on banks' security holdings along with bank balance sheets and data from monetary policy implementation. This granular data facilitates to answer the above question. In addition to the announcement and expectation effects of unconventional monetary policy measures on bond yields, the analysis also exploits the reinvestment decisions that banks have to make when facing maturing securities. ResultsResults suggest that banks facing higher reductions of the average yield of their securities portfolio increase their lending to non-financial firms and households more strongly in response. The effect is particularly pronounced for banks that face more reinvestment decision due to a high fraction of maturing assets. Additionally, banks more affected by the unconventional monetary policy induced yield decline decrease their overall security holdings, especially reducing the holdings of securities with the highest drop in yield. My results shed light on the role of banks in the transmission of unconventional monetary policy. Nichttechnische Zusammenfassung AbstractExploiting a granular dataset of banks' security holdings I assess the impact of unconventional monetary policy on bank lending and security holdings. Using a difference-in-differences regression setup and holding the security composition of each bank constant at its level in January 2014, well in advance of an anticipation of the ECB's asset purchase program (APP), this paper provides evidence for the presence of a yield-induced portfolio rebalancing channel: Banks experiencing a higher average yield decline of their securities portfolio -induced by unconventional expansionary monetary policy -increase their real sector lending more strongly relative to other banks. The effect is stronger for banks facing many reinvestment decisions. Moreover, I find that banks with a higher average yield decline reduce their overall investments in securities more intensely, especially in those securities that had larger valuation gains. These novel findings suggest that banks target a specific yield level and shift their investments from the securities to the (higheryielding) credit portfolio. Making use of data on bank-specific TLTRO uptakes, my results do not seem to be driven by alternative, liquidity-driven transmission channels.

The effect of non‐performing loans on credit expansion: Do capital and profitability matter? Evidence from European banks

“…The expected sign of the growth rate of real GDP is positive because of the procyclicality of bank lending and increased loan demand, and the effect of changes in the policy interest rate could be negative if increases in market rates reduce loan demand, or positive if monetary policy is procyclical. Finally, though the empirical evidence on the impact of LSAPs on bank credit is mixed, several studies suggest that they boosted credit, for example, through the impact of increasing security yields in bank portfolios (Paludkiewicz, 2018; Rodnyansky & Darmouni, 2017) and by encouraging a relaxation of lending standards (Kurtzman, Luck, & Zimmerman, 2018). 4…”