Monetary policy at work: Security and credit application registers evidence

• Authors: José-Luis Peydró.
• BSE Working Paper: 110438 | May 17
• Keywords: monetary policy , bank capital , credit supply , securities , reach-for-yield , haircuts , held to maturity , available for sale , trading book , Euro Area Sovereign Debt crisis
• JEL codes: G01, G21, G28, E52, E58
• monetary policy
• bank capital
• credit supply
• securities
• reach-for-yield
• haircuts
• held to maturity
• available for sale
• trading book
• Euro Area Sovereign Debt crisis

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.