Cutting Out the Middleman – The ECB as Corporate Bond Investor
61 Pages Posted: 19 Jun 2017 Last revised: 23 Jan 2018
Date Written: January 22, 2018
We propose a novel mechanism how central bank interventions can affect the real economy: direct corporate bond purchases by central banks increase firms' demand for bonds relative to loans mitigating banks regulatory or economic constraints. This in turn increases the effectiveness of the bank-lending channel. We test this conjecture in the context of the European Central Bank's Corporate Sector Purchase Programme (CSPP), launched in June 2016, which increases the supply and lowers the cost of capital for eligible, i.e., investment-grade rated, firms. These firms substitute bank term loans with bond debt. Banks with a high share of CSPP-eligible firms in their loan portfolio increase lending to private but not public firms after the announcement of the CSPP. The increase in lending is driven by previously weakly capitalized banks - with low Tier 1 ratio, high non-performing loans and banks from GIIPS countries. Private firms who receive new loans have above median return on assets and interest coverage ratios and increase capital expenditures and sales growth following the CSPP announcement.
Keywords: Monetary Policy, CSPP, ECB, Financial Constraints, Bond Debt, Real Effects
JEL Classification: G01, G21, G28
Suggested Citation: Suggested Citation