Monetary Policy, Macroprudential Policy and Banking Stability: Evidence from the Euro Area

48 Pages Posted: 19 Jul 2013

See all articles by Angela Maddaloni

Angela Maddaloni

European Central Bank (ECB)

José-Luis Peydró

Imperial College London; Centre for Economic Policy Research (CEPR); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Date Written: June 17, 2013

Abstract

We analyze the impact on lending standards of short-term interest rates and macro-prudential policy before the 2008 crisis, and of the provision of central bank liquidity during the crisis. Exploiting the euro area institutional setting for monetary and prudential policy and using the Bank Lending Survey, we show that in the period prior to the crisis, in an environment of low monetary policy interest rates, bank lending conditions unrelated to borrowers’ risk were softened. During the same period, we also provide some suggestive evidence of excessive risk-taking for mortgages loans. At the same time, we show that the impact of low monetary policy rates on the softening of standards may be reduced by more stringent prudential policies on either bank capital or loan-to-value ratios. After the start of the 2008 crisis, we find that low monetary rates helped to 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 central bank provision of long-term liquidity complement each other in working against a possible credit crunch for firms.

Keywords: Monetary policy, macroprudential policy and banking stability

JEL Classification: E51, E52, E58, G01, G21, G28

Suggested Citation

Maddaloni, Angela and Peydro, Jose-Luis, Monetary Policy, Macroprudential Policy and Banking Stability: Evidence from the Euro Area (June 17, 2013). ECB Working Paper No. 1560, Available at SSRN: https://ssrn.com/abstract=2280485

Angela Maddaloni (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jose-Luis Peydro

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, Barcelona 08005
Spain
(+34) 93 542 1756 (Phone)
(+34) 93 542 1746 (Fax)

HOME PAGE: http://https://sites.google.com/site/joseluispeydroswebpage/

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