DP12011 Monetary Policy at Work: Security and Credit Application Registers Evidence

Author(s):	José Luis Peydró, Andrea Polo, Enrico Sette
Publication Date:	April 2017
Date Revised:	August 2018
Keyword(s):	available for sale, bank capital, credit, Euro Area Sovereign Debt Crisis, haircuts, held to maturity, monetary policy, reach-for-yield, securities, trading book
JEL(s):	E52, E58, G01, G21, G28
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=12011

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.