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Quantitative easing, accounting and prudential frameworks, and bank lending

Andrea Orame, Rodney Ramcharan and Roberto Robatto

No 144, ESRB Working Paper Series from European Systemic Risk Board

Abstract: We study whether regulation that relies on historical cost accounting (HCA) rather than mark-to-market accounting (MMA) to insulate banks’ net worth from financial market volatility affects the transmission of quantitative easing (QE) through the bank lending channel. Using detailed supervisory data from Italian banks and taking advantage of a change in accounting rules, we find that HCA makes banks significantly less responsive to QE than MMA. Hence, while HCA can insulate banks’ balance sheets during periods of distress, it also weakens the effectiveness of unconventional monetary policy in reducing firms’ credit constraints through the bank lending channel. JEL Classification: G28, E52, M48

Keywords: bank lending channel; historical cost accounting; regulatory capital; sovereign default premia; unconventional monetary policy (search for similar items in EconPapers)
Date: 2023-08
New Economics Papers: this item is included in nep-acc, nep-ban, nep-eec and nep-mon
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