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working paper
department
of
economics
The Transmission Mechanism
Of Monetary Policy In Europe:
Evidence From Banks' Balance Sheets
Francesco Giavazzi
No. 99-20
October 1999
massachusetts
institute of
technology
50 memorial drive
Cambridge, mass. 02139
WORKING PAPER
DEPARTMENT
OF ECONOMICS
The Transmission Mechanism
Of Monetary Policy In Europe:
Evidence From Banks' Balance Sheets
Francesco Giavazzi
No. 99-20
October 1999
MASSACHUSETTS
INSTITUTE OF
TECHNOLOGY
50 MEMORIAL DRIVE
CAMBRIDGE, MASS. 02142
ABSTRACT
Available studies on asymmetries in the monetary transmission mechanism within
Europe are invariably based on macro-economic evidence: such evidence is abundant but
often contradictory. This paper takes a different route by using micro-economic data.
We use the information contained in the balance sheets of individual banks (available
from the BankScope database) to implement a case study on the response of banks in
France, Germany, Italy, and Spain to a monetary tightening. The episode we study
occurred during 1992, when monetary conditions were tightened throughout Europe.
Evidence on such tightening is provided by the uniform squeeze in liquidity, which
affected all banks in our sample. We study the first link in the transmission chain by
analyzing the response of bank loans to the monetary tightening. Our experiment
provides evidence on the importance of the "credit" channel in Europe, and thus on one
possibly important source of asymmetries in the monetary transmission mechanism. We
do not find evidence of a significant response of bank loans to the monetary tightening,
which occurred during 1992, in any of the four European countries we have considered.
However, we find significant differences both across countries and across banks of
different dimensions in the factors that allow them to shield the supply of loans from the
squeeze in liquidity.
THE TRANSMISSION MECHANISM OF MONETARY POLICY
EVIDENCE FROM BANKS' BALANCE SHEETS
IN EUROPE:
Carlo A. Favero
Francesco Giavazzi
Luca Flabbi
July 1999
We thank seminar participants at the Oesterreichische Nationalbank,
Vienna,
©
Rony Hamaui and Vladimiro Ceci
1999 by Carlo
for
comments on an
permission provided that
full credit,
including
may be
© notice,
The Transmission Mechanism of Monetary Policy
in
All rights reserved.
quoted without explicit
given to the source.
Europe:
Evidence from Banks' Balance Sheets
Carlo A. Favero, Francesco Giavazzi, and Luca Flabbi
July 1999
JELNo. E51.E52.G21
is
University of
earlier draft.
A Favero, Francesco Giavazzi and Luca Flabbi.
Short sections of text, not to exceed two paragraphs,
at the
Introduction
1
This paper studies the monetary transmission mechanism in Europe, a topic that has
attracted
new
attention following the start of the
transmission mechanism across the
EMU-wide symmetric
short-term interest rates.
different
stability
The
ECB
of the timing and the magnitude
bank lending
it
is
to
monetary policy.
well known, banks are
The
continental Europe.
firms
is
When
at the
it
looking, in Europe, for
is
from
natural to start
center of financial intermediation in
share of bank loans in total debt liabilities of non-financial
—by
85 per cent in Germany, 80 in France, 95 in Italy and 77 in Spain
30 per cent.
contrast, in the U.S., this share is about
In this paper
from four
EU
we
use balance sheet information from a sample of 651 banks
states (France,
Germany,
Italy
and Spain) to study
responded to an episode of monetary tightening. The episode
during 1992.
was
of maintaining price
EMU.
asymmetries in the monetary transmission mechanism,
As
raising
consider a potentially important channel for such asymmetries, related to
the response of
banks.
would respond by
real variables— the output cost
could be quite unevenly distributed across
We
a critical
consequences of the monetary contraction were
to another—both in terms
of the responses of the relevant
monetary
monetary policy. Consider, as an example,
inflationary shock.
If the
from one country
in the
members of the monetary union could be
factor in determining the effects of the single
an
EMU. Asymmetries
As opposed
looser in 1992 than
we
how bank
investigate occurred
to the four continental countries, British
it
had been
in 1991: this is the reason
lending
monetary policy
why we
excluded the
UK from our sample of large EU states.
When
it
the central
bank tightens monetary policy by squeezing bank
reserves,
can generate a corresponding reduction in the supply of bank loans. There are two
ways
of
in
which a bank can prevent
its liabilities
by
CD's or interbank
the supply of loans
this
from happening.
It
can change the composition
issuing instruments not subject to a reserve requirement (such as
loans); alternatively
is
it
can
sell
bonds. If this does not happen, and
reduced, the monetary contraction will affect the real economy,
unless firms can substitute at no cost bonds and commercial paper for loans.
effect
(known
as the "credit channel", see e.g.
the supply side and amplifies the
effect
more
Bernanke and
traditional
Gertler,
1
This
995) works on
"money channel"— i.e.
the
demand
of a monetary contraction, which affects new marginal spending by modifying
borrowing conditions and by affecting asset prices, and thus the market value of
wealth.
Our use of micro
bank
central
data to study the transmission of monetary policy from the
banks
to
is
macroeconomic time-series
"money" channel:
the
by
motivated
are
ill-suited
the
well-known
identify
to
money channel works through
channel works through their assets, but assets and
observation
channel from a
a "credit"
banks'
that
liabilities,
and the credit
liabilities are tightly related
by
accounting identities, thus posing a difficult identification problem. For this reason the
evidence proposed by macroeconomic studies which look
fluctuations in response to shifts in the quantities
decisive (see
Bernanke and Blinder, 1992).
On
at
output
and price
of loans and deposits
is
rarely
the contrary, micro-economic data
allow one to identify the presence of a credit channel by testing the specific empirical
implication of the credit view: namely that the responses of banks (and firms) to a
shift in
monetary policy should
for instance, find
central
bank
more
it
liquidity
differ
depending on their characteristics. Small banks,
difficult to insulate their loans' portfolio
because they typically cannot substitute CD's and interbank
loans for deposits at no cost. Moreover,
Wilcox (1993) show
Stein and
"weak"
from a squeeze in
(that is their share
Kashyap and Stein (1997b), and Kashyap,
that, in the
case of the U.S., small banks are typically
of cash+securities+reserves over
total assets is
low) and are
thus unable to use their liquid assets as a buffer.
So
far,
tests
of the credit channel based on the importance of bank
characteristics in determining the response
been limited to U.S.
The
data.
of our analysis
result
Our paper
is
a
new
is
the
of loans to a
first
shift in
monetary policy have
study of this kind concerning Europe.
twist in the study of asymmetries in the
monetary
transmission mechanism in Europe. In this area too, macroeconomic data, have been
unable to detect significant asymmetries in the transmission mechanism
on macroeconomic data
inflation
First, the
typically look at the impact
of a
'.
Studies based
shift in interest rates
and output country-by-country. Such evidence, however,
is
on
hardly decisive.
standard errors are often large, so that one can seldom reject the hypothesis
of symmetry even
if the point estimates are
very different across countries. Second,
the estimates are not robust to the 'Lucas critique' since they are based
on samples
See Gerlach andSmets 1995, Ramaswamy andSloek 1997, Barran, Coudert andMojon 1997, Britton
and Whitley 1997, Dornbusch, Favero and Giavazzi 1998, Kieler and Saarenheimo 1998, Cecchetti
1999.
from a pre-EMU monetary regime—and one of the main
that of
the
way European monetary
changing the
macroeconomic evidence on asymmetries
policy
in
is
effects
of
conducted.
EMU
More
monetary transmission
precisely
is
importantly,
is
mute
to the
question of which are the sources of the observed asymmetries—thus providing no
guidance for policymakers
who wish
to
do something
to
reduce
themA
first
attempt
at
using micro data to document the asymmetries in the monetary transmission mechanism
has been provided by Maclennan et
al.
(1998)
who examine
the European housing
market.
A
of this paper
limit
link in the chain
first
by concentrating on banks, we can study
of monetary policy transmission.
investigate the response of
example, Kashyap
is that,
European firms
et al.,1993 for the
US
to a similar
An
obvious extension would
monetary tightening
case). This will
just the
(see, for
be the object of a separate
paper.
The evidence reported
ECB may
EMU,
in this paper also sheds light
run into a "liquidity trap". There
ECB may
that the
when
powerless.
If,
the
is
curve
is flat
at the start
of
a situation in which
IS-LM framework
ineffective. In the traditional
LM
possibility that the
widespread concern,
face a period of deflation, that
monetary policy may become
liquidity trap occurs
is
on the
the
and monetary policy thus becomes
however, monetary policy also works through a credit channel, then an
expansion will
shift
the IS curve outward (more precisely, the
CC,
credit
and
commodities, curve in the notation of Bernanke and Blinder, 1988) via the effect of
bank
liquidity
on the supply on
Finding that the credit channel
the
ECB, were
it
results,
and thus on consumption and investment.
important inside
to face conditions of deflation.
The paper
our case study.
is
loans,
is
We
organised as follows.
We
EMU would thus be
for
2
start
explaining
why we
chose 1992 for
then describe our data, our econometric specification and our
both with respect to the empirical relevance of the credit channel, and to the
induced asymmetries in the transmission mechanism across the
2
good news
Note, however, that the credit channel
not the only
mechanism which could avoid
which monetary policy can shift the IS curve would produce such
are wealth effects in the consumption function.
any situation
alternative
is
EMU.
in
a liquidity trap:
result.
An obvious
The
2
case study
Our empirical
shift in
We
strategy runs as follows.
first
identify an episode of synchronised
monetary policy: the EMU-wide tightening of monetary conditions which
As an
occurred during 1992.
measure of bank
cash plus reserves. This variable
liquidity:
bank
intervention of the central
individual banks. Looking at
we
indicator of the stance of monetary policy
in the
is
affected
use a
by the
market for bank reserves, but varies across
we document an
thisvariable,
important shift in the
supply of banks' liquidity during 1992. The next step consists in identifying the
impact of the squeeze in liquidity on the supply of loans by individual banks:
this
by
we do
whether the observed differences across banks are consistent with
testing
their
with their size and with the strength of their balance
characteristics, in particular
sheet.
We
started
by considering data
for
banks in six European countries: two core
EMU states (France and Germany), two peripheral EMU states (Spain and Italy), plus
Sweden and
the
UK. As we
shall explain later on, the final analysis
was
restricted to
the four continental countries.
Our micro-data come from BankScope, a
banks.
3
reports
The database contains
and
countries.
financial database covering 9,400
financial information collected
re-classified in a standard format in order to
The
unconsolidated
data
are
balance
available
sheet
in
information
for
the size of the sample excluding those banks for
from
is
1988.
following
the
commercial banks, saving banks, cooperative banks, real
and long term credit banks. The Bankscope panel
from the banks' annual
make them comparable
format
panel
estate
world
We
banking
have
across
used
categories:
mortgage banks, medium
not balanced:
we
therefore reduced
which some observations on one or more
of the relevant variables were missing.
Measuring monetary policy
3
Our case study depends
policy.
It is
crucially
in
on a
by now well established
Evans, 1999) that monetary policy
for
bank reserves because
BankScope
agency.
Europe
is
collected
this
is
correct identification of the shift in
(see, for
is
monetary
example, Christiano, Eichenbaum and
best identified
by concentrating on
the market where the central
by Bureau van Dijk, a private
institution
the market
bank intervenes
and IBCA, an international rating
directly.
Moreover, wider monetary aggregates are contaminated by demand shocks.
In Figure
we
1
give a very stylised representation of the market for bank reserves in
Europe.
The demand schedule
sloped: the
demand
is
for reserves
determined by the behaviour of banks.
it
includes two
flat
The supply schedule
sections
and a
vertical one.
The
interest rates
standing facilities provide an upper and a lower bound to the overnight
can deposit funds with the central banks
from the central bank
marginal
at the
lower than the deposit
rate,
fluctuates inside a corridor.
vertical, consistently
nor can
rate, t"
it
1
:
{"'",
at the deposit rate,
ax
.
is
on the two
Banks
rate.
and borrow funds
Therefore, the overnight rate cannot be
be higher than the marginal lending
The upward sloping segment of
rate:
it
the supply schedule
is
with a central bank that fixes the volume of bank reserves by
using open market operations, independently of the overnight
Figure
negatively
depends on the quantity of bank deposits, which are
negatively related to the opportunity cost of holding money.
piecewise:
It is
The Market
for
Bank Reserves
in
rate.
Europe
Overnight rate
Bank Reserves
If the central
bank
targets the overnight interest rate,
exogenous monetary
policy shocks will be reflected in fluctuations of the overnight rate, while
in
bank reserves
will
mainly be driven by demand shocks. This
of demand shocks on the overnight rate would be
shifts in this variable
would
reflect
sterilized
is
by the
movements
because the impact
central
bank so
only shocks on the supply side. Conversely,
that
if the
bank
central
of bank reserves, exogenous monetary policy shocks will
targets the level
be reflected in movements in reserves (see Bernanke and Mihov, 1998).
banks
in
well established that the Bundesbank and the other European central
is
It
our sample have followed an interest rate targeting rule
However,
data.
on banks from different countries,
do, cross-sectional data
why
This explains
mechanism based on macro
policy in studies of the transmission
we
.
used to measure the stance of monetary
interest rates are the variable traditionally
using, as
4
interest rates
cannot be very informative: here fluctuations in interest rates would simply represent
On
country dummies.
reserves,
the other hand,
which we observe
at the individual
monetary policy from fluctuations
We
are supply driven.
real interest rates
5
do
and
this
in reserves,
plenty of variation in the level of
bank
We
level.
by identifying those fluctuations which
The
variables are observed at the end of the
1
1992
is
a year of monetary tightening;
loosening. However, only in 1992
we can
policy: during this year interest rates
1993
real interest rates
and reserves move
and reserves move
in the
same
a recession: the contraction in bank reserves that
result
direction,
we
also
1
and
in opposite directions,
During 1993, instead,
and the output gap signals
observe in 1993
shows the behaviour of bank reserves
each of the six countries: the value of reserves
7
rates.
We
is
is
thus likely to
6
for all
banks in our sample,
expressed in
US
dollars at 1991
note immediately that the shift in bank reserves during 1992
wasrather homogeneous across continental Europe.
Sweden and
the
UK,
4
Policy reaction functions for European Central Banks are estimated by Bernanke and
Clarida and Gertler 1996. Dornbusch et
As
monetary
of demand shocks.
Table
exchange
one of monetary
is
attribute the shift in reserves to
output gaps do not signal any major fluctuation in the cycle.
in
in reserves, in
note two major shifts in real interest rates, occurring in 1992 and 1993,
respectively.
be the
thus extract a measure
by analysing simultaneously movements
in output gaps.
year and are reported in Table
We
we have
a proxy for policy rates
we
al.,
instead, are
Mihov
1997,
1998.
use three-month Euro-rates; real rates are built using the realised CPI
inflation rate.
Our measure of monetary policy
practice
we have
coefficient
is
affected
by changes
in the
compulsory reserves
coefficients. In
only one occurence of such a modification: in France, where in 1992 the reserve
on sight deposits was reduced from four per cent
to
one per
cent.
We
have dealt with
this
case by considering the shift in reserves net of the effect of the change in the compulsory reserves
regime.
We use constant exchange rates because current exchange rates would bias our measure of the change
in
monetary policy, being affected by the fluctuations of the U.S. dollar against
currencies which occurred during 1992.
all
the European
different in that there
no evidence of a monetary tightening
is
monetary policy was looser
in 1992.
Sweden. For these reasons
for
European
states,
we
Moreover,
limit
we have
in
1992
—
in fact
UK
very few observations (15)
our empirical analysis to the four continental
and we studythe effects of monetary policy during 1992 only.
thus do not exploit the panel dimension of the data
set: rather,
we
We
concentrate on a cross-
section for a single year.
We
further selected our sample
was marginal (defined
by excluding those banks whose lending
as banks featuring a loans-to-total assets ratio of less than
activity
20 per
cent at the end of 1991) and those likely to have been involved in a merger (defined as
banks whose
total assets increased
by more than 50 per cent
in the course
of 1992). Table
2 summarizes the properties of our selected sample. This includes 156 French banks
out of a total of 1823, 221
German banks
out of 3716, 153 Italian banks out of 368,
121 Spanish banks out of 323. Medium-size and large banks are well represented in
the sample (the sample includes over 90 per cent of
all
banks with
total assets in
excess of 100 million U.S. dollars) but very small banks are under-represented
However, a comparison with the universe of banks covered by the
OECD
shows
8
.
that
the banks in our sample account for a very large fraction of the overall banking
industry, as
84
in Italy
measured by
total loans: 81
and 92 per cent
per cent in France, 70 per cent in Germany,
in Spain.
Identifying the "lending channel"
4
Since output gaps remain relatively
that
we
flat
between 1991 and 1992,
observe in the quantity of loans as a
curve, driven
As
by a
interpret the shift
movement along an unchanged demand
shift in supply.
discussed above, the main empirical prediction of the lending view
the effects of monetary policy
heterogeneous.
We
aim
variables: the 'strength'
on banks depend on
their characteristics,
at capturing these cross-sectional differences
and the
'size'
of a bank's balance
Following Kashyap and Stein (1997b)
sheet
we
by the sum of three
Based on the average number of branches per bank, Cerasi
and are thus
by using two
the strength of a balance
and reserves, as a fraction of
et al.
that
sheet.
we measure
items, cash, securities
is
total
(1998) conclude that BankScope
good approximation of the German and French commercial banking systems, but
represents big banks for the other major European countries.
it
is
a
slightly over-
assets.
bank
The idea
is
that a balance sheet
to insulate the supply
Banks of similar
is 'strong'
when
of loans from fluctuations
in
it
thus allowing a
is liquid,
monetary policy.
might have balance sheets of different strength, thus
size
inducing them to respond differently to monetary policy. Size, moreover, can capture
elements of the lending view that are not related to the strength of the balance sheet:
larger
banks might find
it
easier to issue a variety of
market instruments (such as
of deposit) which also can shelter their lending from
certificates
shifts in
monetary
policy.
We thus divide our sample in ten deciles.
of banks'
distribution
By
distribution.
65. In each cell
decile
total assets for all countries in
construction the total
of Table 3
we
deciles are constructed using the
our sample. Table 3 reports
number of banks
report, country
and the percentage of those banks over
distribution of
The
by
in each decile is constant at
country, the
total
this
number of banks
in the
banks within each country. If the
banks in each country was equal to the European distribution, such
number would be
0.10.
Higher values indicate a higher concentration of banks in that
We
decile for that particular country.
across the four countries :there
is
observe a rather uniform distribution of banks
no evidence of asymmetries in the
size distribution
of banks acrossthe four European countries included in our sample.
analysis comparable with that of
To make our
Kashyap and Stein (1997b) consider
that in their
sample banks are divided in three groups: the 95th percentile defines 'small' banks,
that is
banks with
total assets less
contained in the 95
European banks
and
Stein: the 3
and 950
th
to
in our
rd
99
th
than U.S.$
percentiles,
1
million;
medium-size banks are those
and large banks are in the top percentile. The
sample are larger than the U.S. banks considered by Kashyap
decile in our sample contains banks with assets
between U.S.$ 615
million.
As
regards the relative 'strength' of the banks in our sample
we
observe (see
Table 4) a rather homogeneous distribution within countries, with the only exception
of the German banks belonging to the upper two deciles of the distribution
are relatively "weaker" than smaller
banks in
Italy
and Spain are
German
relatively stronger
banks. Across countries
we
—which
note that
—possibly a consequence of the large
stocks of public debt issued in these countries, and of the significant
bank holdings of
such debt.
To provide
Table
a
5, the
first
visual impression of the relevance of the lending channel
we show,
in
monetary tightening and the response of bank loans for each decile of our
we
sample. First
note that the monetary tightening was rather uniformly distributed,
across banks of different size, in France and Spain, while in
concentrated
among
larger banks.
The response of loans
Germany and
to the
Italy
it is
monetary tightening
is
uniformly very low.
We
explore further this
first
analysis of the responses of
evidence in the next section by implementing an econometric
bank loans
to
monetary policy.
5
Econometric evidence
We
estimate, separately for each country, the following equation:
ALoanSj = a +
>
'10
10
>
^bj DECILE j +
Y^Cj DECILEj
7=1
y=i
where ALoans denotes the percentage change
*
in loans
STRENGTHi
from 1991
*
A Re serves + w,j
to 1992;
AReserves
denotes the percentage change in bank reserves over the same period;. Strength
measure of balance sheet strength [(cash+securities+reserves)/total
1991;
DECILEj
distribution
on
are ten
total assets
The parameters
credit channel
dummy
assets] at the
variables discriminating banks
is
our
end of
by decile of the
of all four countries in our sample for 1991.
in these equations provide information
by describing the response of bank loans
on the presence of a
to the shift in
monetary policy,
allowing for the possibility that such response be non-linear and a function of both the
size
and the strength of a bank. The regression measures dLoans /d Re serves dSize and
dLoans fd Re serves dSizedStrength. Under the
null that the credit channel operates
both effects should be significant. The size effect should be positive but declining
from the lower
negative.
errors.
9
upper decile of the distribution; the strength effect should be
The estimation method
Each equation
Germany,
and 3
to the
also includes
5 for France, 3 for Spain
that are
is
OLS
with heteroscedasticity-consistent standard
dummies
to take
and 5 for
Italy
account of
9
based upon the estimates reported
in
.
Our
Table
outliers:
results are
6
dummies
shown
for
in Figures
6.
Outliers are defined as banks with residual larger, in absolute value, than twice the standard error of
The outliers are Caixabank, Banco Mapfre, Banco de Credito Finanzia in Spain;
Euromobiliare SpA, Credito Romagnolo, Credito Italiano, Banca Internazionale Lombarda, Banca di
Credito di Trieste SpA in Italy; Volksbank Bad Reichenhall, Svenska Handelsbanken (Niederlassung
the regression.
Frankfurt),
Ost-West Handelsbank AG, Deutsche Handelsbank AG, Credito
Italiano
Bank, Bank
2
we
Overall
policy in the four
find
for a lending channel of the transmission
no evidence
EMU countries we
study.
The
test for this
of monetary
hypothesis, namely of a zero
response of loans to a change in reserves, (reported in Table 6) confirms the visual
impression reported in Table 5 above: the null
From
is
never rejected.
the viewpoint of understanding the possible role of the lending channel in
EMU one
determining asymmetries in the monetary transmission mechanism inside
could
stop here: asymmetries cannot be ascribed to a difference across countries in the response
of bank loans to monetary policy
—
at least in the four countries
based on the evidence from our case study.
This
result,
to
produce the
total
however,
way
aggregation of banks of different size and strength: the
we
these
consider,
is
and
at least
obtained from the
two variables combine
impact on bank loans of a change in reserves differs interestingly both
across banks of different size and strength, and across different countries.
We
shall
comment our
results
country where the aggregate result
nor
its
components are
is
by country,
starting
from France. France
confirmed decile-by-decile: neither the
significant, with the possible exception of the third
the only
is
total impact,
which
decile
displays a positive and significant impact of monetary policy on loans, cancelled
by the
compensating effect of balance sheet strength.
For Germany our results show that the largest banks (those belonging to the upper
40 percent of the distribution) use
their strength to shield their loans
monetary. Notably, as shown in Table
relatively small:
one interpretation of
the 'weaker' a bank's balance sheet.
4, the
from the
average strength of large
effects
of
German banks
is
this result is that strength is important, the
The
non
effects are
the distribution, with the exception of the
first.
The
more
so,
significant in all other deciles of
smallest
German banks respond
to the
squeeze in liquidity by expanding their loans—contrary to the prediction of the credit
—and
—
view
this
impact
is
again, contrary to
sheet
compensated by a positive
what the
bank balance sheets belonging
amount of
securities,
credit
effect of the strength
view would
to this percentile
predict.
shows
is
The expansion
analysis of individual
that small banks, holding a small
respond to the cut in reserves by expanding their loans—probably to
reap the benefit of the increase in intermediation margins that
rates.
The
of their balance
in loans is financed through
accompany higher
an increase in deposits
interest
—an option
that
only available to banks that hold excess reserves. Consider, for example, the case of
Kreiss
AG
in
France.
SBT - Batif SA, National Bank of Kuwait (France) SA, Caisse Nationale de
CNCA, Banque Revillon, Banque de Realisations de Gestion et de Financement in
Germany;
Credit Agricole
Bankhaus Carl
&
Plump
F.
Co. from Bremen: between 1991 and 1992 reserves
fall
by 20
per cent, while loans increase by 9 per cent and deposits by 5 per cent.
The same behaviour of small banks characterizes
Spanish banks.
On
the contrary, neither the size, nor the strength of
in determining the response
6
So
Italian and, to a lesser extent,
banks are significant
of loans to monetary policy for large banks in these countries.
Conclusions
far,
the available empirical evidence
mechanism across Europe was mostly
on asymmetries
in the
monetary transmission
limited to studies based on
macroeconomic
data.
This literature often suggests that the credit channel could be one important factor lying
behind the observed asymmetries (see
e.g.
Our case study of the monetary
Kashyap and
tightening of
1
Stein, 1997b, 1997c.)
992
in
Europe finds no evidence of
a lending channel in the response of bank loans to monetary policy. Such result
is
explained by different behaviour of banks across different deciles of the European
distribution
and across different countries. Small banks
their excess liquidity to
restriction.
expand deposit and loans
Large German banks use the strength of
from monetary policy
monetary policy
in
fluctuations;
in
10
continental European markets
.
systems such as Germany and
their balance sheets to insulate loans
do not react
to
credit channel in France is consistent with the evidence
market
most "anglo-saxon" among the
the
is
Interestingly this also holds for bank-centred financial
The underdevelopment of
Italy.
the difficulty that firms face
when
be a serious problem
absence of a response of
if the
financial markets (and thus
attempting to substitute out of bank loans) could
total loans
still
hides a shift in their
a reallocation of loans from small to large firms.
Kashyap and Stein (1997a)
Europe simply by looking
at
and France, use
presence of a monetary policy
in
loans of banks in other deciles
suggesting that the French financial
i.e.
Italy
any country.
The apparent absence of a
composition,
Germany,
at
importance the lending view for
try to assess the
summary
statistics,
without running regressions. They look
banks and firms separately. Their analysis of banks
is
based on two indicators: the
importance of small banks, and the health of banks. Based on these two indicators, they
assign grades to countries: the extremes are grade
sensitivity
A—which
of the lending channel to monetary policy
For instance securities represent 15 per cent of
The same percentage
is
20
in the U.S.,
is
denotes countries where the
weak—and grade C, which denotes
total liabilities
of French non-financial enterprises.
19 in the U.K., 6 in Germany, 5 in
Italy,
9
in Spain.
The
data
a strong sensitivity of the lending channel.
The grades
6 of Kashyiap and Stein, 1997a) the
grade refers to the importance of small banks,
the second to
bank
health):
B-C
Spain. These rankings do not
first
for France,
show
C-B
significant
are as follows (as reported in Table
Germany, B-C
for
for Italy
and B-B for
asymmetries across countries
—although
our econometric results indicate a uniform A-grade for
all
however, when they consider, along with the bank
two firm-related factors—the
relative importance of small firms,
is
when they
ranking that
and the
factors,
availability, to firms,
countries.
of non-bank finance—that
consider the second link in the lending channel chain,
is
Interestingly,
closer to ours, except for Italy: Italy C-, France B/C,
come up with
they
a
Germany B, Spain B.
This evidence confirms the need to complement the findings in the present paper with an
analysis of firms' response to a shift in the supply of bank loans.
Finally, our results provide a
new framework
for thinking about the effects of the
ongoing consolidation of the European banking industry. Strength
determining the response of large banks to monetary policy
Germany where,
large Spanish
as discussed above, large
and
Italian
less important
in
banks in our sample could be related to the high level of public
over time. If the large
a factor that
German banks provide
the consolidation of the industry, then strength will
in shaping the response
significantly
banks are relatively weak. The strength of the
—
become
the key factor in
—very
debt in those countries, and to the large bank holdings of such debt
to
is
a
is
likely
benchmark
become a much more important
for
factor
of European banks to monetary policy.
References
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for International Settlements (1995)
Financial Structure and the Monetary Policy
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Mojon (1997) La transmission des politiques monetaires dans
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G-7 countries" BIS discussion paper
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the
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the composition of external finance", American Economic
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J.C. Stein (1997a)
"The
role of
implications for the European monetary union",
banks in monetary policy: a survey with
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,
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(1997b) "What do a million bank have to say about the
transmission of monetary policy?"
Kashyap A.K. and
M and T.
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and M.Stephens (1998) "Asymmetries
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are the differences?",
</ref section>
IMF
Staff Papers
.
A
Economic Papers No.
EU: What
Table
1:
The monetary
+ reserves)
tightening as measured by the change in banks'
liquidity (cash
Year
Country
Number of
Bank
Output
Liquidity
Gap
Banks
Real
ST
Interest
Rate
Germany
Italy
Spain
Sweden
UK
Difference
($ Millions)
(%)
1,626
1992
156
156
1993
156
1,148
1994
1995
151
1,121
147
1,321
1996
140
1991
1992
1993
1991
France
Absolute Values
0.2
7.2
-0.6
9.6
4.4
-3.5
4.3
-2.3
-2.4
4.5
17.8
-2.1
2.9
1,689
27.9
-2.5
1.7
221
221
314
283
3.6
4.4
-9.7
2.8
5.4
-0.6
1.7
-6.8
-0.3
2.7
1995
1996
212
207
258
240
254
285
-9.1
1994
221
221
1991
153
1,272
1992
153
1993
152
1994
1995
1996
1,099
-32.4
5.8
-1.1
2.0
12.3
-1.6
1.8
1.4
6.5
1,158
-9.0
0.2
8.4
735
-36.5
-2.6
4.0
151
876
19.2
-2.3
5.1
141
1,000
14.1
-1.1
4.9
136
993
-0.6
-2.3
4.3
1991
1992
121
1993
121
1994
121
1995
1996
119
117
426
397
374
414
417
448
1991
15
1,482
1.9
5.5
1992
15
1,491
0.6
-0.6
8.8
1993
15
1,529
2.6
-3.8
3.0
1994
1995
1996
15
1,333
-12.8
-2.2
5.6
15
3,027
127.1
-0.9
6.4
15
2,795
-7.7
-1.5
4.5
1991
77
581
1992
1993
77
1,229
77
1994
1995
1996
76
121
4.1
7.5
-6.8
2.1
10.0
-5.7
-1.3
4.1
10.6
-1.4
4.0
0.6
-1.3
5.0
7.5
-2.1
3.2
-0.7
6.6
111.5
-2.7
4.4
1,225
-0.3
-2.9
3.5
1,326
8.3
-0.8
3.7
75
1,695
27.8
-0.4
3.3
71
1,678
-1.0
-0.2
4.0
Note: Balance sheet data are converted from national currencies into
exchange
rate.
potential
GDP
Bank
US
dollars using a constant (1991)
The Output Gap is the deviation of actual GDP from
GDP. The Real Short-Term Interest Rate is the Three-month
liquidity is equal to reserves.
as a percentage of potential
minus annual CPI inflation. All data observed at the end of period.
Source: Bank Liquidity: Authors' computation on data from the BankScope Data-set (by Bureau Van
Dijk and IBCA).
Exchange Rate: IMF, IFS, November 1997 (end of period market exchange rate).
Output Gap: OECD, Economic Outlook, December 1998.
euro-rates
Table 2: Assets and
sample (1991).
Number
of Banks in
OECD statistics, BankScope and our
OECD
Bankscope
Our Sample
France
Number of banks
Total assets as percentage of total assets of
OECD
all
1823
183
156
100
82.2
80.6
recorded banks
Germany
Number of banks
Total assets as percentage of total assets of
OECD
all
3716
248
221
100
74.4
70.1
368
161
153
100
87.8
83.6
recorded banks
Italy
Number of banks
Total assets as percentage of total assets of
OECD
all
recorded banks
Spain
Number of banks
323
138
121
Total assets as percentage of total assets of
100
93.2
91.6
OECD
all
recorded banks
Note: BankScope sample (see source below)
relevant variables in 1991.
Our sample
is
is
limited to banks with no missing observations in the
limited to banks with:
(i)
a ratio loans/assets
> 20%;
(ii)
between 1992 and 1991 < 50%.
Source: Authors' computation on data from the BankScope Data-set (by Bureau Van Dijk and IBCA);
IMF, IFS, November 1997 (end of period market exchange rate).
variation in assets
OECD, Bank Profitability,
1998.
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Fig. 2:
Response of Loans
to
Monetary Policy
Germany
France
in
our Sample: Point Estimation and
Spain
Italy
6
11
16
26
21
36
31
46
41
51
56
61
71
76
81
86
3rd decile
Spain
Italy
91
96
101
106
111
116
121
126
4th decile
0.06
0.06
^
i
A/'u/VWv-]
i
0.03
0.00
Confidence Interval.
2nd decile
1st decile
1
95%
Germany
France
s!\AjM.
'•1
-0.03
-
^7\ f\A/Y v \f
11
-0.06
131
136
141
146
151
156
166
161
'
WW
.Wfay
-
-0.03
l
V
*
0.00
i
v
v
j
0.03
1
171
-0.06
176
181
186
191
196
197
202
207
212
217
222
227
232
237
242
247
361
366
371
376
381
386
491
496
501
506
511
516
626
631
636
641
646
252
257
6th decile
5th decile
0.06
262
267
272
277
282
287
292
297
302
307
312
317
326
322
331
336
341
346
351
356
8th decile
7th decile
0.06
-0.06
-0.06
391
396
401
406
411
416
421
426
431
436
441
446
456
451
461
466
471
476
9th decile
486
10th decile
0.06
0.06
481
0.03
0.00
'^
~-Y> /y\
-
4-L.j..
-0.03
\)r\J
•••*
'
i
-0.06
-0.06
521
526
531
536
541
546
551
556
561
566
571
576
Note: See table 6 for complete estimation results and
581
statistics.
586
591
596
601
606
611
616
621
Fig. 3a:
The Response of Loans
to
Monetary Policy
in
our Sample: the effect of "Size" and "Strength".
Germany
France
Italy
Spain
1st decile
.'
6
1
16
11
•-'-'>..-
26
21
31
36
41
46
51
56
61
101
106
111
116
121
126
166
171
176
181
186
191
231
236
241
246
251
256
296
301
306
31
316
321
2nd decile
0.40
-0.40
66
71
76
81
86
96
91
3rd decile
-0.40
131
136
146
141
156
151
161
4th decile
0.20
0.10
0.00
-0.10
-0.20
196
201
206
211
216
221
226
5th decile
0.20
261
266
Note: Effect of size:
276
271
;
286
281
effect of strength
See table 6 for complete estimation results and
statistics.
291
;
total effect
/\
1
Fig. 3b:
The Response of Loans
to
Monetary Policy
in
our Sample: the effect of "Size" and "Strength".
Germany
France
Italy
Spain
6th decile
346
356
351
361
366
371
376
381
386
426
431
436
441
446
451
491
496
501
506
511
7th decile
391
396
406
401
416
411
421
8th decile
456
461
466
476
471
486
481
9th decile
0.10
"
0.00
»
v v rwV^AA
.
**
*.
-0.10
521
526
536
531
546
541
551
556
561
566
571
576
10th decile
0.20
0.10
\
-0.10
-0.20
586
591
Note: Effect of size:
601
596
;
effect
606
611
of strength
See table 6 for complete estimation results and
statistics.
616
621
;
total effect
626
/\
631
636
641
646
651
DEC
200(Date
Due
Lib-26-67
3 9080 019 7 6574