Monetary Policy at Work: Security and Credit Application Registers Evidence

51 Pages Posted: 26 Apr 2017 Last revised: 27 Apr 2017

Jose-Luis Peydro

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE); Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR)

Andrea Polo

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics (Barcelona GSE); Centre for Economic Policy Research (CEPR)

Enrico Sette

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: April 26, 2017

Abstract

The potency of the bank lending channel of monetary policy may be limited if banks rebalance their portfolios towards securities, e.g. to pursue risk-shifting or liquidity hoarding. To test for the bank lending and risk-taking (reach-for-yield) channels, we therefore analyze banks’ securities trading, in addition to credit supply, in turn allowing us to also study the empirical relevance of key financial frictions. For identification, since the creation of the euro, we exploit the security and credit application registers owned by the central bank of Italy. In crisis times, we find that, with softer monetary policy, less capitalized banks prefer buying securities rather than increasing credit supply (not due to lack of good loan applications), thereby impacting firm-level real outcomes. Moreover, more – not less – capitalized banks reach-for-yield, which is inconsistent with the risk-shifting hypothesis. Results suggest that the main drivers at work are access to liquidity and risk-bearing capacity, and not regulatory capital arbitrage. Finally, in pre-crisis times, when financial frictions are limited, less capitalized banks do not expand securities holdings over credit supply.

Keywords: monetary policy, securities, loan applications, bank capital, reach-for-yield, held to maturity, available for sale, trading book, haircuts, regulatory arbitrage, sovereign debt

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

Suggested Citation

Peydro , Jose-Luis and Polo, Andrea and Sette, Enrico, Monetary Policy at Work: Security and Credit Application Registers Evidence (April 26, 2017). Available at SSRN: https://ssrn.com/abstract=2958917

Jose-Luis Peydro

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/

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

HOME PAGE: http://www.barcelonagse.eu/Faculty.php?id=432

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Andrea Polo (Contact Author)

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

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Enrico Sette

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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