ECB corporate QE also transmitted through bank lending – ECB research

The corporate bond purchases carried out by the European Central Bank have been complemented in improving companies’ financing conditions by bank lending.

In ECB corporate QE and the loan supply to bank-dependent firms, Frank Betz and Roberto De Santis analyse the transmission mechanism of this part of the ECB’s asset purchase programme.

“We find clear evidence that the CSPP [corporate sector purchase programme] is transmitted also through the bank lending channel,” say Betz and De Santis. “The unconventional monetary policy freed up balance sheet capacity of banks to lend to companies that do not have access to the corporate bond market.”

The authors say the financing conditions of eurozone companies have improved considerably since the ECB started buying corporate debt in March 2016. “Corporate bond spreads tightened and corporate bond issuance increased, with large corporations certainly benefiting from the policy.”

Furthermore, the researchers point to recent work by Benjamin Grosse-Rueschkamp, Sascha Steffen and Daniel Streitz, which documents stronger effects for banks with low Tier 1 and high non-performing loan ratios. “We do not find a role for bank balance sheet quality. This result has important policy implications, because the spillover effects is independent from the quality of banks’ balance sheets,” Betz and De Santis say.

In the context of ECB corporate quantitative easing, “banks with low Tier 1 ratios and high non-performing loans increase lending to private (and profitable) firms, which experience a growth in capital expenditures and sales”, say Grosse-Rueschkamp, Steffen and Streitz.