The Unintended Consequences of ECB’s Asset Purchases. How Excess Reserves Shape Bank Lending

Philipp Roderweis, Jamel Saadaoui and Francisco Serranito

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: An unintended by-product of asset purchases by the European Central Bank (ECB) has been a huge increase in excess reserves, leading to a structural liquidity surplus in the banking sector of the euro area. These exogenously imposed excess reserves imply higher balance sheet costs, forcing banks to offset these costs by changing their lending behavior. We observe this effect particularly in periods of low-interest rates. Thus, we identify a shock that represents an exogenous imposition of excess reserves on banks. We then employ linear and nonlinear local projection methods to analyze how lending changes in the context of unconventional monetary policy. We find that excess reserves injected by the ECB crowd out certain types of credit. An increase in excess liquidity does not stimulate lending to nonfinancial corporations in the euro area. On the contrary, it tends to discourage it while amplifying household credit for consumption and housing, as well as loans to financial corporations. Impulse response analysis via smooth local projection methods highly confirms these findings.

Keywords: excess reserves; bank lending channel; bank balance sheet costs; local projection; smooth local projection. (search for similar items in EconPapers)
JEL-codes: C32 E44 E51 E52 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-ifn and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2023-34

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