by Angela Maddaloniaa and José-Luis Peydrób
We analyze the impact on lending standards of monetary policy rates and macroprudential policy before the 2008 crisis, and of monetary rates and long-term public liquidity during the crisis. Exploiting the euro-area institutional setting for monetary and prudential policy and using the Bank Lending Survey, we find robust evidence that low monetary policy interest rates soften lending conditions unrelated to borrowers' risk in the period prior to the crisis, and some suggestive evidence of excessive risk-taking due to low interest rates for mortgage loans. Moreover, the impact of low monetary policy rates on the softening of standards is reduced by more stringent prudential policy on either bank capital or loan-to-value ratio. After the start of the 2008 crisis, we find that low monetary rates soften lending conditions that were tightened because of bank capital and liquidity constraints, especially for business loans. Importantly, this softening effect is stronger for banks that borrow more long-term liquidity from the Eurosystem. Therefore, the results suggest that monetary policy rates and public provision of long-term liquidity complement each other in reducing a credit crunch for firms.
JEL Codes: E51, E52, E58, G01, G21, G28.
Full article (PDF, 49 pages 468 kb)
Discussion by Egon Zakrajšek
a European Central Bank
b Universitat Pompeu Fabra and Barcelona GSE