The Augmented Bank Balance-Sheet Channel of Monetary Policy

68 Pages Posted: 12 Nov 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: November 1, 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: bank balance sheets, bank lending, bank risk taking, euro-area heterogeneity, transmission of monetary policy

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 (November 1, 2022). ECB Working Paper No. 2022/2745, Available at SSRN: https://ssrn.com/abstract=4275321 or http://dx.doi.org/10.2139/ssrn.4275321

Christian Bittner (Contact Author)

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

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 ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

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