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Monetary policy at work: Security and credit application registers evidence

Jose-Luis Peydro (), Andrea Polo () and Enrico Sette

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: Monetary policy transmission may be impaired if banks rebalance their portfolios towards securities to pursue e.g. risk-shifting or liquidity hoarding. We identify the bank lending and risk-taking channels by exploiting – Italian’s unique – credit and security registers. In crisis times, with softer ECB’s monetary policy conditions, less capitalized banks increase securities over credit supply, with associated firm-level real effects. However, less capitalized banks buy securities with lower yield (haircuts), even within securities with identical regulatory risk weights, thus reaching-for-safety/liquidity. Results are only present in marked-to-market portfolios. The evidence suggests that liquidity and risk-bearing capacity – rather than riskshifting or regulatory arbitrage – are key drivers of banks’ behavior. Differently, in pre-crisis times, securities do not crowd-out loan application granting by less capitalized banks.

Keywords: monetary policy; securities; loan applications; bank capital; reach-for-yield; held to maturity; available for sale; trading book; haircuts; regulatory arbitrage; sovereign debt. (search for similar items in EconPapers)
JEL-codes: E51 E52 E58 G01 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-mac and nep-mon
Date: 2017-04, Revised 2018-08
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