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The Augmented Bank Balance-Sheet Channel of Monetary Policy

Farzad Saidi
Glenn Schepens
Florian Heider
Christian Bittner
Publication Year 
JEL Code 
E44 - Financial Markets and the Macroeconomy
E52 - Monetary Policy (Targets, Instruments, and Effects)
E58 - Central Banks and Their Policies
E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
F45 - Macroeconomic Issues of Monetary Unions
G20 - General
G21 - Banks; Other Depository Institutions; Mortgages
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.
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