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Does the Lack of Financial Stability Impair the Transmission of Monetary Policy?

57 Pages Posted: 16 Nov 2015 Last revised: 19 Sep 2017

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Björn Imbierowicz

Copenhagen Business School

Sascha Steffen

Frankfurt School of Finance & Management

Daniel Teichmann

Goethe University Frankfurt - House of Finance

Date Written: September 7, 2017

Abstract

We investigate the transmission of central bank liquidity to bank deposits and loan spreads in Europe over the January 2006 to June 2010 period. We find evidence consistent with an impaired transmission channel due to bank risk. Central bank liquidity does not translate into lower loan spreads for high-risk banks, even as it lowers deposit rates for both high-risk and low-risk banks. This adversely affects the balance sheets of high-risk bank borrowers, leading to lower payouts, lower capital expenditures, and lower employment. Overall, our results suggest that banks’ capital constraints at the time of an easing of monetary policy pose a challenge to the effectiveness of the bank lending channel and the effectiveness of the central bank as a lender of last resort.

Keywords: Central bank liquidity, Unconventional monetary policy, Monetary policy transmission, Corporate deposits, Financial crisis, Banking crisis, Loans, Real Effects

JEL Classification: E43, E58, G01, G21

Suggested Citation

Acharya, Viral V. and Imbierowicz, Björn and Steffen, Sascha and Teichmann, Daniel, Does the Lack of Financial Stability Impair the Transmission of Monetary Policy? (September 7, 2017). Available at SSRN: https://ssrn.com/abstract=2691049 or http://dx.doi.org/10.2139/ssrn.2691049

Viral Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Björn Imbierowicz

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+4538153736 (Phone)

Sascha Steffen (Contact Author)

Frankfurt School of Finance & Management ( email )

Sonnemannstr. 9 -11
Frankfurt, 60314
Germany

HOME PAGE: http://www.sascha-steffen.de

Daniel Teichmann

Goethe University Frankfurt - House of Finance ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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