Paper #1565

Title:

Monetary policy at work: Security and credit application registers evidence

Authors:

José-Luis Peydró, Andrea Polo and Sette Enrico

Date:

April 2017 (Revised: April 2018)

Abstract:

Monetary policy transmission may be impaired if banks rebalance their portfolios towards securities to e.g. risk-shift or hoard liquidity. We identify the bank lending and risk-taking channels by exploiting - Italian's unique - credit and security registers. In crisis times, with higher ECB liquidity, less capitalized banks react by increasing securities over credit supply, inducing worse firm-level real effects. However, they buy securities with lower yields and haircuts, thus reaching-for-safety and liquidity. Differently, in pre-crisis time, securities do not crowd-out credit supply. The substitution from lending to securities in crisis times helps less capitalized banks to repair their balance-sheets and then restart credit supply with a one year-lag.

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 codes:

E51, E52, E58, G01, G21

Area of Research:

Finance and Accounting / Macroeconomics and International Economics / Labour, Public, Development and Health Economics

Published in:

Review of Financial Economics, 140(3), June 2021, pp. 789-814, DOI: https://doi.org/10.1016/j.jfineco.2021.01.008

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