Free DP Download 24 September 2020 - Pandemic response policies and bank lending conditions

Thursday, September 24, 2020

Carlo Altavilla, Francesca Barbiero, Miguel Boucinha, Lorenzo Burlon  
CEPR DP No. 15298 | August 2020

The unprecedented policy response to the Covid-19 crisis, in the form of new and more targeted measures, has been crucial for counteracting the adverse economic consequences associated with the outbreak and intensification of the crisis and mitigated for substantial credit losses for banks. 

A new CEPR study by Carlo Altavilla, Francesca Barbiero, Miguel Boucinha and Lorenzo Burlon analyses the policy measures taken in the euro area in response to the outbreak of Covid-19, with a focus on those directly targeted at improving bank lending conditions. The study uses data on participation in central bank liquidity operations, high-frequency reactions to monetary policy announcements, and confidential supervisory information on bank capital requirements. The study reaches three mains conclusions: 

  1. The results show that in the absence of the funding cost relief and capital relief associated with the pandemic response measures, banks' ability to supply credit would have been severely affected.
  2. The coordinated intervention by monetary and prudential authorities amplified the effects of the individual measures in supporting liquidity conditions and helping to sustain the flow of credit to the private sector. 
  3. In absence of monetary and prudential policies, the pandemic would lead to a significantly larger decline in firms' employment.

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