One Size May Not Fit All: Banking Fragmentation and European Monetary Policies

Abstract

This paper investigates the impact of ECB policies on credits considering financial and banking fragmentation. Using European data from the past decade, we estimate SVAR models to analyse the regional impact of conventional and unconventional measures on price and volume indicators of fragmentation. The risk-taking channel is studied using GVAR models to document the national consequences of this fragmentation. We find that unconventional measures increase credit volumes in peripheral countries. Monetary policies alleviate financial and banking fragmentation, but mostly in terms of price dispersion rather than credit volume. Finally, unconventional measures imply a rebalancing of European bank assets in favour of foreign currency denominated assets. .

Keywords: Financial fragmentation, banking fragmentation, risk-taking channel, monetary policy

JEL Classification: E44, E50, F36, F42, F45