Finance Seminar with José-Luis Peydró, Universitat Pompeu Fabra
The Department of Finance is proud to announce the upcoming seminar with José-Luis Peydró, Universitat Pompeu Fabra.
José-Luis Peydró will present:
Monetary Policy at Work: Security and Credit Application Registers Evidence
José-Luis Peydró, Universitat Pompeu Fabra
Andrea Polo, Universitat Pompeu Fabra
Enrico Sette, Bank of Italy
Extended Abstract (Preliminary- Work in Progress) pdf
The potency of the bank lending channel of monetary policy may be limited if for example banks hoard the liquidity in, or do risk-shifting with, securities. We analyze the transmission channel of monetary policy focusing on banks’ securities trading, in addition to lending. We study: Does softer monetary policy in crisis encourage banks to increase their securities holdings? Are effects stronger than for the credit supply channel? Do lowly capitalized banks prefer securities holdings to the supply of credit to the real sector? If so, is it because of lack of good borrowers in loan applications or because of lack of capital? Which banks take on higher yield via securities, lowly capitalized banks (gambling for resurrection) or higher capitalized banks (risk-bearing capacity)? What about credit supply and reach-for-yield in lending? What are the monetary policy transmission differences in normal versus crisis times?
For identification, we exploit, since the creation of the euro, the security and credit registers owned by the central bank of Italy in its role of supervisor. The security register contains – at the security (ISIN) level – all securities investments of all Italian banks, including e.g. yields, ratings and maturity at the security-bank-month level. The credit register, apart from the granted loans, includes loan applications and loan rates at the firm-bank-month level.
We find the following preliminary results. First, in both normal and crisis times, when monetary policy (respectively conventional and unconventional) becomes softer, banks increase their holdings of securities. Effects are stronger in crisis times for securities than for credit supply. Second, in crisis times, banks with lower capital prefer to buy securities rather than granting loan applications to non-financial firms when monetary policy is softer, while the opposite happens in normal times. Third, in both periods, banks with more capital buy riskier securities (higher ex-ante yield) when policy is softer. Risk-bearing capacity and access to public liquidity (instead of risk-shifting or regulatory arbitrage) appears to be the main drivers of security trading in crisis times. On the other hand, in normal times, lowly capitalized banks take on higher risks in the loan portfolio by granting loan applications to riskier borrowers with higher ex-ante yield; these banks then seem to use the security portfolio to hedge the higher risk they assume in lending.