DP11584 Mending the broken link: heterogeneous bank lending and monetary policy pass-through

Author(s): Carlo Altavilla, Fabio Canova, Matteo Ciccarelli
Publication Date: October 2016
Keyword(s): European Banks, Heterogeneity, Monetary pass-through, VARs
JEL(s): C23, E44, E52, G21
Programme Areas: Financial Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11584

We analyse the pass-through of monetary policy measures to lending rates to firms and households in the euro area using a unique bank-level dataset. Banks' characteristics such as the capital ratio and the exposure to sovereign debt are responsible for the heterogeneity of pass-through of conventional monetary policy changes. The location of a bank is instead irrelevant. Non-standard measures normalized the capacity of banks to grant loans resulting in a significant compression in lending rates. Banks with a high level of non-performing loans and a low capital ratio were the most responsive to the measures. Finally, we quantify the effects of non-standard policies on the real economic activity using a standard macroeconomic model and find that in absence of these measures both inflation and output gap would have been significantly lower.