Does Lack of Financial Stability Impair the Transmission of Monetary Policy?

Viral Acharya, Bjorn Imbierowicz, Sascha Steffen and Daniel Teichmann

No 24, HIT-REFINED Working Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: We investigate the transmission of central bank liquidity to bank deposit and loan spreads of European firms over the January 2006 to June 2010 period. When the European Central Bank (ECB) allocated liquidity to banks in a competitive tender at the beginning of the crisis, higher “aggregate” central bank liquidity (i.e. the total liquidity in the banking system that is held at the ECB) reduces bank deposit rates of low risk banks but has no effect on deposit rates of high risk banks or on corporate loan spreads of high or low risk banks. After the ECB started to fully allot all liquidity requested by banks via its refinancing operations on October 8, 2008, an increase in liquidity decreases deposit rates of both high and low risk banks. While loan spreads of low risk banks decrease, those of high risk banks remain unchanged also under full allotment of liquidity. We find that borrowers of high risk banks refinance term loans drawing down loan commitments. They have lower payouts, lower capital expenditures and lower asset growth compared with borrowers of low risk banks. Our results suggest a differential transmission of central bank liquidity of low versus high risk banks, and an impaired transmission to corporate borrowers of high risk banks.

Keywords: Central Bank Liquidity; Corporate Deposits; ECB; Financial Crisis; Loans (search for similar items in EconPapers)
JEL-codes: E43 E58 G01 G21 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2015-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/27310/wp024.pdf

Related works:
Journal Article: Does the lack of financial stability impair the transmission of monetary policy? (2020)
Working Paper: Does the Lack of Financial Stability Impair the Transmission of Monetary Policy? (2019)
Working Paper: Does the lack of financial stability impair the transmission of monetary policy? (2019)
Working Paper: Does the lack of financial stability impair the transmission of monetary policy? (2019)
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