The Augmented Bank Balance-Sheet Channel of Monetary Policy

64 Pages Posted: 28 Mar 2022

See all articles by Christian Bittner

Christian Bittner

Deutsche Bundesbank; Goethe University Frankfurt

Diana Bonfim

Banco de Portugal; Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics

Florian Heider

Leibniz Institute for Financial Research SAFE; Goethe University Frankfurt; Centre for Economic Policy Research (CEPR)

Farzad Saidi

University of Bonn

Glenn Schepens

European Central Bank (ECB)

Carla Soares

Bank of Portugal

Multiple version iconThere are 4 versions of this paper

Date Written: February 17, 2022

Abstract

This paper studies how banks' balance sheets and funding costs interact in the transmission of monetary-policy rates to banks' credit supply to firms. To do so, we use credit-registry data from Germany and Portugal together with the European Central Bank's policy-rate cuts in mid-2014. The pass-through of the rate cuts to banks' funding costs differs across the euro-area currency union because deposit rates vary in their distance to the zero lower bound (ZLB). When the distance is shorter, banks' financing constraints matter less for the supply of credit and there is more risk taking. To rationalize these findings, we provide a simple model of an augmented bank balance-sheet channel where in addition to costly external financing, there is screening of borrowers and a ZLB on retail deposit rates. An impaired pass-through of monetary policy to banks' funding costs reduces their ability to lever up and weakens their lending standards.

Keywords: transmission of monetary policy, bank lending, bank risk taking, bank balance sheets, euro-area heterogeneity

JEL Classification: E44, E52, E58, E63, F45, G20, G21

Suggested Citation

Bittner, Christian and Bonfim, Diana and Heider, Florian and Saidi, Farzad and Schepens, Glenn and Soares, Carla, The Augmented Bank Balance-Sheet Channel of Monetary Policy (February 17, 2022). Available at SSRN: https://ssrn.com/abstract=4047820 or http://dx.doi.org/10.2139/ssrn.4047820

Christian Bittner

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Goethe University Frankfurt ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt, Hesse 60629
Germany

Diana Bonfim

Banco de Portugal ( email )

Av Almirante Reis, 71
P-1150-012 Lisboa
Portugal

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Florian Heider (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt, 60323
Germany

Goethe University Frankfurt ( email )

Finance Department
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Farzad Saidi

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Glenn Schepens

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Carla Soares

Bank of Portugal

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

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