Monetary Policy, macroprudential Policy, and Banking Stability: Evidence from the Euro Area
by Angela Maddaloniaa and José-Luis Peydrób
We analyze the impact on lending standards of monetary
policy rates and macroprudential policy before the 2008 crisis,
and of monetary rates and long-term public liquidity during
the crisis. Exploiting the euro-area institutional setting for
monetary and prudential policy and using the Bank Lending
Survey, we find robust evidence that low monetary policy interest
rates soften lending conditions unrelated to borrowers’ risk
in the period prior to the crisis, and some suggestive evidence
of excessive risk-taking due to low interest rates for mortgage
loans. Moreover, the impact of low monetary policy rates on
the softening of standards is reduced by more stringent prudential
policy on either bank capital or loan-to-value ratio.
After the start of the 2008 crisis, we find that low monetary
rates soften lending conditions that were tightened because of
bank capital and liquidity constraints, especially for business
loans. Importantly, this softening effect is stronger for banks
that borrow more long-term liquidity from the Eurosystem.
Therefore, the results suggest that monetary policy rates and
public provision of long-term liquidity complement each other
in reducing a credit crunch for firms.
JEL Codes: E51, E52, E58, G01, G21, G28.
(PDF, 49 pages 468 kb)
Discussion by Egon Zakrajek
a European Central Bank
b Universitat Pompeu Fabra and Barcelona GSE