Credit channel

Philip R. Lane: The compass of monetary policy: favourable financing conditions

Retrieved on: 
Friday, February 26, 2021

Speech by Philip R. Lane, Member of the Executive Board of the ECB, at Comissão do Mercado de Valores Mobiliários 25 February 2021IntroductionIn my remarks today, I will set out some considerations for thinking about favourable financing conditions as the compass guiding monetary policy.

Key Points: 

Speech by Philip R. Lane, Member of the Executive Board of the ECB, at Comissão do Mercado de Valores Mobiliários


    25 February 2021

Introduction

    • In my remarks today, I will set out some considerations for thinking about favourable financing conditions as the compass guiding monetary policy.
    • First, I will explain the logic of employing the favourability of financing conditions as the compass for monetary policy.
    • In assessing financing conditions, it is desirable to adopt a holistic approach, based on a multi-faceted set of indicators for both bank-based and market-based financing conditions.
    • Accordingly, in the following sections, I next turn to the analysis of bank-based funding conditions, which is followed by the analysis of market-based financing conditions.

Favourable financing conditions as the compass

    • The phrase favourable financing conditions intentionally puts the spotlight on a pivotal section of the transmission mechanism that links the basic monetary policy instruments controlled by central banks (policy rates, asset purchases and refinancing operations) to the ultimate objective of delivering the medium-term inflation aim.
    • Under pandemic conditions, two threats to the efficiency of monetary policy can be clearly identified.
    • First, frictions in financial intermediation may disrupt the transmission of monetary policy impulses to the financing conditions for key economic actors (households, firms and governments).
    • In this context, a focus on preserving favourable financing conditions as the compass guiding monetary policy addresses both concerns.
    • First, it emphasises that the central bank is committed to recalibrating its underlying policy instruments if it detects any threat to the favourability of financing conditions.
    • Second, clear communication that the financing conditions directly relevant to households, firms and governments will remain favourable during the pandemic period reduces uncertainty and bolsters confidence, thereby encouraging spending and investment, and ultimately underpinning the economic recovery and inflation.
Chart 1

    Realised and projected HICP inflation (year-on-year percentage changes, quarterly averages)
    • In turn, vigorous inflation dynamics are only likely if the overall economic recovery is robust.
    • The preservation of favourable financing conditions for an extended period of time helps to support inflation developments through multiple channels.
    • [3] First, the commitment to preserving favourable financing conditions reduces financing uncertainty for banks, corporates, households and governments alike.
    • Keeping favourable financing conditions in this environment could even accelerate the dynamics of the recovery, since better economic prospects combined with attractive financing conditions can fast-track consumption and investment.
    • [4] In particular, in December, the Governing Council pledged that purchases under the PEPP will be conducted to preserve favourable financing conditions over the pandemic period.
    • Overall, we need to assess indicators that provide information on the whole gamut of transmission from upstream stages to downstream effects.
    • Other financial indicators also feed into the staff macroeconomic projections and are incorporated into the Governing Councils regular assessments of the appropriate monetary stance.

Bank-based financing conditions

    • [5] The pandemic and the measures to contain the spread of the virus have severely disrupted economic activity and curtailed business revenues.
    • The avoidance of adverse feedback loops between the real economy and financial markets is a central task for policy makers.
    • In turn, banks have been able and willing to meet the strong demand for liquidity over the course of the pandemic.
    • The euro area bank lending survey (BLS) confirms that high loan demand of firms was accommodated by banks, which met the demand for bridge financing despite the rapid worsening of economic prospects in the second quarter of 2020.
    • Monetary, supervisory and fiscal policies have been central to supporting bank lending conditions since the onset of the pandemic in terms of volumes and lending rates, which are around historically low levels for both firms and households.
    • [6] The favourable impact of the TLTRO III on bank lending conditions and lending volumes has been signalled clearly by banks in the BLS.
Chart 2

    Changes in credit standards and demand for loans to euro area firms in 2020 (net percentages of banks reporting an easing (+)/tightening (-) of credit standards and an increase (+)/decrease (-) in loan demand; net loan flows in EUR billions)
    • In the autumn, however, signals from the BLS pointed to a broad-based tightening in credit conditions, even though bank lending rates have remained at historically favourable levels.
    • Banks attribute the tightening of bank lending conditions to the intensification of risks to creditworthiness and the prospect of possible loan losses in the future, especially as the pandemic has lasted longer than originally expected.
    • While Chart 3 shows that the net tightening of credit standards on loans to firms remains moderate compared with the global financial and sovereign debt crises, it signals potential risks to future loan growth.
Chart 3

    BLS bank lending conditions and loan growth to firms (left-hand scale: net percentages of banks reporting an easing (+)/tightening (-) of credit standards and an increase (+)/decrease (-) in loan demand; right-hand scale: percentages)
    • It follows that the evolution of corporate vulnerabilities and their possible ramifications for the bank-intermediated financing conditions facing the real economy should be closely monitored.
    • This adverse interaction would be reinforced if household spending were to weaken and thereby were to further dampen the prospects for firms.
    • These upstream-downstream inter-connections underline the critical importance of market-based financing conditions for the entire economy, not just for those entities that directly raise funding in the capital markets.

Market-based financing conditions

    • Even households and small businesses which finance themselves via banks rather than in the market incur changes in their cost of funding through the impact of market-based financing conditions on bank-based financing conditions.
    • In addition, market-based financing conditions influence non-bank intermediation, since the costs and benefits to participants in this sector vary with shifts in returns on investment.
    • [8] Ensuring that the risk-free yield curve remains at highly accommodative levels is a necessary (but not sufficient) condition for ensuring that overall financing conditions are supportive enough to counter the negative pandemic shock to the projected inflation path.
    • As such, sovereign yields are a key element in determining general financing conditions in all sectors and jurisdictions across the euro area.
Chart 4

    Bank and sovereign bond yields (daily; percentages per annum; x-axis: sovereign yields; y-axis: bank bond yields)
Chart 5

    Corporate and sovereign bond yields (daily; percentages per annum; x-axis: sovereign yields; y-axis: corporate bond yields)
    • In one direction, shifts in the OIS yield curve and the GDP-weighted sovereign yield curve are early indicators of changes in the downstream set of indicators.
    • In the other direction, these yield curve indicators are responsive to re-calibrations of our primary monetary policy instruments.
    • Our monetary policy measures can contribute to preserving the OIS yield curve and the GDP-weighted sovereign yield curve at favourable levels.
    • Following a temporary disconnect at the onset of the pandemic in the spring of 2020, our monetary policy actions successfully restored a close co-movement between the OIS curve and the GDP-weighted sovereign yield curve, most notably through the market stabilisation function of the PEPP (Chart 6).
Chart 6

    10-year GDP-weighted sovereign yield and 10-year nominal OIS rate in the euro area (percentages per annum)
    • Chart 7 shows that there was a considerable lowering of the middle and long segments of these yields curves over the course of 2020.
    • By mid-December, these curves were relatively flat compared to the short-term policy rate (the deposit facility rate).
    • In the initial weeks of 2021, there has been a steepening of these curves.
Chart 7

    Euro area risk-free OIS and GDP-weighted sovereign yield curves and the ECB’s deposit facility rate (y-axis: percentages per annum; x-axis: maturity in years)
    • This assessment will vary over time, taking into account revisions to the economic and inflation outlook.
    • The integrated nature of global financial markets also means that there are clear spillovers across different currency areas in terms of the underlying shocks driving bond yields.
    • Such financial spillovers are especially consequential if economies are at different stages of the economic cycle.
    • For any given level of nominal interest rates, a generalised increase in expected inflation provides a boost to inflation dynamics by reducing economy-wide real rates.
    • Tracking the full set of inflation expectations across the range of economic actors (financial market participants, firms, households) is, of course, a demanding exercise.

Conclusions

    • In this environment, ample monetary stimulus remains essential to preserve favourable financing conditions over the pandemic period for all sectors of the economy.
    • By helping to reduce uncertainty and bolster confidence, this will encourage consumer spending and business investment, underpinning economic activity and safeguarding medium-term price stability.
    • In particular, the purchases made under the PEPP will be conducted to preserve favourable financing conditions over the pandemic period.
    • Accordingly, the ECB is closely monitoring the evolution of longer-term nominal bond yields.

Philip R. Lane: The compass of monetary policy: favourable financing conditions

Retrieved on: 
Friday, February 26, 2021

Speech by Philip R. Lane, Member of the Executive Board of the ECB, at Comissão do Mercado de Valores Mobiliários 25 February 2021IntroductionIn my remarks today, I will set out some considerations for thinking about favourable financing conditions as the compass guiding monetary policy.

Key Points: 

Speech by Philip R. Lane, Member of the Executive Board of the ECB, at Comissão do Mercado de Valores Mobiliários


    25 February 2021

Introduction

    • In my remarks today, I will set out some considerations for thinking about favourable financing conditions as the compass guiding monetary policy.
    • First, I will explain the logic of employing the favourability of financing conditions as the compass for monetary policy.
    • In assessing financing conditions, it is desirable to adopt a holistic approach, based on a multi-faceted set of indicators for both bank-based and market-based financing conditions.
    • Accordingly, in the following sections, I next turn to the analysis of bank-based funding conditions, which is followed by the analysis of market-based financing conditions.

Favourable financing conditions as the compass

    • The phrase favourable financing conditions intentionally puts the spotlight on a pivotal section of the transmission mechanism that links the basic monetary policy instruments controlled by central banks (policy rates, asset purchases and refinancing operations) to the ultimate objective of delivering the medium-term inflation aim.
    • Under pandemic conditions, two threats to the efficiency of monetary policy can be clearly identified.
    • First, frictions in financial intermediation may disrupt the transmission of monetary policy impulses to the financing conditions for key economic actors (households, firms and governments).
    • In this context, a focus on preserving favourable financing conditions as the compass guiding monetary policy addresses both concerns.
    • First, it emphasises that the central bank is committed to recalibrating its underlying policy instruments if it detects any threat to the favourability of financing conditions.
    • Second, clear communication that the financing conditions directly relevant to households, firms and governments will remain favourable during the pandemic period reduces uncertainty and bolsters confidence, thereby encouraging spending and investment, and ultimately underpinning the economic recovery and inflation.
Chart 1

    Realised and projected HICP inflation (year-on-year percentage changes, quarterly averages)
    • In turn, vigorous inflation dynamics are only likely if the overall economic recovery is robust.
    • The preservation of favourable financing conditions for an extended period of time helps to support inflation developments through multiple channels.
    • [3] First, the commitment to preserving favourable financing conditions reduces financing uncertainty for banks, corporates, households and governments alike.
    • Keeping favourable financing conditions in this environment could even accelerate the dynamics of the recovery, since better economic prospects combined with attractive financing conditions can fast-track consumption and investment.
    • [4] In particular, in December, the Governing Council pledged that purchases under the PEPP will be conducted to preserve favourable financing conditions over the pandemic period.
    • Overall, we need to assess indicators that provide information on the whole gamut of transmission from upstream stages to downstream effects.
    • Other financial indicators also feed into the staff macroeconomic projections and are incorporated into the Governing Councils regular assessments of the appropriate monetary stance.

Bank-based financing conditions

    • [5] The pandemic and the measures to contain the spread of the virus have severely disrupted economic activity and curtailed business revenues.
    • The avoidance of adverse feedback loops between the real economy and financial markets is a central task for policy makers.
    • In turn, banks have been able and willing to meet the strong demand for liquidity over the course of the pandemic.
    • The euro area bank lending survey (BLS) confirms that high loan demand of firms was accommodated by banks, which met the demand for bridge financing despite the rapid worsening of economic prospects in the second quarter of 2020.
    • Monetary, supervisory and fiscal policies have been central to supporting bank lending conditions since the onset of the pandemic in terms of volumes and lending rates, which are around historically low levels for both firms and households.
    • [6] The favourable impact of the TLTRO III on bank lending conditions and lending volumes has been signalled clearly by banks in the BLS.
Chart 2

    Changes in credit standards and demand for loans to euro area firms in 2020 (net percentages of banks reporting an easing (+)/tightening (-) of credit standards and an increase (+)/decrease (-) in loan demand; net loan flows in EUR billions)
    • In the autumn, however, signals from the BLS pointed to a broad-based tightening in credit conditions, even though bank lending rates have remained at historically favourable levels.
    • Banks attribute the tightening of bank lending conditions to the intensification of risks to creditworthiness and the prospect of possible loan losses in the future, especially as the pandemic has lasted longer than originally expected.
    • While Chart 3 shows that the net tightening of credit standards on loans to firms remains moderate compared with the global financial and sovereign debt crises, it signals potential risks to future loan growth.
Chart 3

    BLS bank lending conditions and loan growth to firms (left-hand scale: net percentages of banks reporting an easing (+)/tightening (-) of credit standards and an increase (+)/decrease (-) in loan demand; right-hand scale: percentages)
    • It follows that the evolution of corporate vulnerabilities and their possible ramifications for the bank-intermediated financing conditions facing the real economy should be closely monitored.
    • This adverse interaction would be reinforced if household spending were to weaken and thereby were to further dampen the prospects for firms.
    • These upstream-downstream inter-connections underline the critical importance of market-based financing conditions for the entire economy, not just for those entities that directly raise funding in the capital markets.

Market-based financing conditions

    • Even households and small businesses which finance themselves via banks rather than in the market incur changes in their cost of funding through the impact of market-based financing conditions on bank-based financing conditions.
    • In addition, market-based financing conditions influence non-bank intermediation, since the costs and benefits to participants in this sector vary with shifts in returns on investment.
    • [8] Ensuring that the risk-free yield curve remains at highly accommodative levels is a necessary (but not sufficient) condition for ensuring that overall financing conditions are supportive enough to counter the negative pandemic shock to the projected inflation path.
    • As such, sovereign yields are a key element in determining general financing conditions in all sectors and jurisdictions across the euro area.
Chart 4

    Bank and sovereign bond yields (daily; percentages per annum; x-axis: sovereign yields; y-axis: bank bond yields)
Chart 5

    Corporate and sovereign bond yields (daily; percentages per annum; x-axis: sovereign yields; y-axis: corporate bond yields)
    • In one direction, shifts in the OIS yield curve and the GDP-weighted sovereign yield curve are early indicators of changes in the downstream set of indicators.
    • In the other direction, these yield curve indicators are responsive to re-calibrations of our primary monetary policy instruments.
    • Our monetary policy measures can contribute to preserving the OIS yield curve and the GDP-weighted sovereign yield curve at favourable levels.
    • Following a temporary disconnect at the onset of the pandemic in the spring of 2020, our monetary policy actions successfully restored a close co-movement between the OIS curve and the GDP-weighted sovereign yield curve, most notably through the market stabilisation function of the PEPP (Chart 6).
Chart 6

    10-year GDP-weighted sovereign yield and 10-year nominal OIS rate in the euro area (percentages per annum)
    • Chart 7 shows that there was a considerable lowering of the middle and long segments of these yields curves over the course of 2020.
    • By mid-December, these curves were relatively flat compared to the short-term policy rate (the deposit facility rate).
    • In the initial weeks of 2021, there has been a steepening of these curves.
Chart 7

    Euro area risk-free OIS and GDP-weighted sovereign yield curves and the ECB’s deposit facility rate (y-axis: percentages per annum; x-axis: maturity in years)
    • This assessment will vary over time, taking into account revisions to the economic and inflation outlook.
    • The integrated nature of global financial markets also means that there are clear spillovers across different currency areas in terms of the underlying shocks driving bond yields.
    • Such financial spillovers are especially consequential if economies are at different stages of the economic cycle.
    • For any given level of nominal interest rates, a generalised increase in expected inflation provides a boost to inflation dynamics by reducing economy-wide real rates.
    • Tracking the full set of inflation expectations across the range of economic actors (financial market participants, firms, households) is, of course, a demanding exercise.

Conclusions

    • In this environment, ample monetary stimulus remains essential to preserve favourable financing conditions over the pandemic period for all sectors of the economy.
    • By helping to reduce uncertainty and bolster confidence, this will encourage consumer spending and business investment, underpinning economic activity and safeguarding medium-term price stability.
    • In particular, the purchases made under the PEPP will be conducted to preserve favourable financing conditions over the pandemic period.
    • Accordingly, the ECB is closely monitoring the evolution of longer-term nominal bond yields.

How does monetary policy affect investment in the euro area?

Retrieved on: 
Thursday, November 26, 2020

By Elena Durante, Annalisa Ferrando, and Philip Vermeulen[1] We set out to analyse the monetary policy transmission mechanism by documenting how the annual investment of more than one million firms in Germany, Spain, France and Italy responded to monetary policy shocks between 2000 and 2016.

Key Points: 
  • By Elena Durante, Annalisa Ferrando, and Philip Vermeulen[1] We set out to analyse the monetary policy transmission mechanism by documenting how the annual investment of more than one million firms in Germany, Spain, France and Italy responded to monetary policy shocks between 2000 and 2016.
  • This confirms that monetary policy is affecting firms investment through two different channels.
  • On the other hand, as young firms are more likely to face financing constraints, their stronger than average reaction can be explained by the balance sheet channel of monetary policy transmission.

Introduction

    • Monetary policy affects firms investment through both an interest rate channel and a balance sheet channel.
    • First, through the interest rate channel, monetary policy can affect firms demand for capital as an input into the production process.
    • This is because interest rates affect decisions on saving or investing and can boost aggregate demand.
    • The external finance premium is the difference between the cost of borrowing funds externally and generating them internally.
    • Another reason why the impact on firms investment varies is the height of the external finance premium they face.
    • This article explains how we analyse these two channels of monetary policy transmission in the euro area, i.e.
    • by documenting the heterogeneous reaction of firms investment to monetary policy shocks (Durante, Ferrando and Vermeulen, 2020).

Data and estimation method

    • We use firm-level data from the four largest economies in the euro area (Germany, Spain, France and Italy) to construct a large and rich dataset covering more than one million firms throughout 2000-16.
    • As a proxy for the euro area policy rate we use the high-frequency monetary policy shock series from Jarociski and Karadi (2020).
    • Since firm-level investment data are annual, we construct an annual monetary policy shock data series by aggregating the monthly shocks into twelve-month totals.
    • We split the firms into different groups, based on what we already know about firms being affected differently by different transmission channels.
    • Younger firms have shorter credit histories and should therefore be more vulnerable than older ones to any tightening of credit conditions.

Findings

    • how firms investment reacts to a tightening of monetary policy.
    • The investment rate of the average firm does not react initially, but drops by 3.4 percentage points in the year following the monetary policy shock.
    • In the second year after the shock, the investment rate remains at this lower level.
    • Chart 1 Average investment reaction to a monetary policy shock
    • firms below 10 years of age, react more strongly to a surprise than the average firm.
    • Similarly, firms that produce durables react more strongly than firms providing services.
    • Chart 2 illustrates that a combination of these characteristics leads to substantial differences in firms reactions to monetary policy.
    • One year after the surprise, the investment rate of young firms in the durables sector drops by 5.0 percentage points.
    • [2] Mature firms, between 10 and 20 years of age, exhibit a reaction within those two extremes (4.4 percentage points for mature firms producing durables and 2.9 percentage points for mature firms providing services).

Conclusions

    • In the aftermath of a monetary policy shock, firms that produce durables cut back their investment more than firms providing services.
    • Young firms also react more, indicating that the balance sheet channel of monetary policy is having an impact.
    • Ultimately, these findings provide a deeper understanding of the transmission of euro area monetary policy to the real economy.
    • They point to important differences across firms a feature that is not yet routinely embedded in the standard macroeconomic models.

References

Access to finance for small and medium-sized enterprises after the financial crisis: evidence from survey data

Retrieved on: 
Wednesday, June 17, 2020

Access to finance for small and medium-sized enterprises since the financial crisis: evidence from survey data Prepared by Katarzyna Bańkowska, Annalisa Ferrando and Juan Angel Garcia[1]1 IntroductionMoreover, firms across different countries and sectors faced the same issue.

Key Points: 

Access to finance for small and medium-sized enterprises since the financial crisis: evidence from survey data


    Prepared by Katarzyna Bańkowska, Annalisa Ferrando and Juan Angel Garcia[1]

1 Introduction

    • Moreover, firms across different countries and sectors faced the same issue.
    • Monetary policy measures, including non-standard ones, have contributed to improving access to finance for euro area non-financial corporations since the GFC.
    • While SMEs financing conditions have significantly improved over recent years, some important challenges remained even before the coronavirus (COVID-19) pandemic that started late in 2019.
    • the difference between financial needs and the availability of external funding remained for specific financing instruments, notably the market-based ones.
    • Diversification across alternative financing instruments can make an important contribution to resilience against adverse financial and real shocks.
    • Also, a combination of leasing/factoring and short-term loans was of particular importance for SMEs, compared with larger firms.

2 Access to finance and credit rationing over time

    • These phases have coincided with periods over which the monetary transmission mechanism was impaired to various degrees, negatively affecting SMEs financing conditions.
    • Therefore, ECB measures taken to restore the transmission mechanism also had a positive impact on SMEs access to finance during those periods.
    • The first phase covered the period from the launch of the survey in 2009, to September 2012, when the Outright Monetary Transactions (OMT) programme was announced.
    • During this period, SMEs reported that access to finance ranked second, after finding customers, among the biggest obstacles to conducting business (see Chart 1).
    • Since spring 2016, only about 8% of SMEs have reported access to external financing as their main concern, compared with nearly 20% in 2009.
    • The percentage of firms that perceived access to finance as their main problem was consistently higher for SMEs than for large companies over the whole period concerned (see Chart 1).


    Chart 2 Most significant problems faced by euro area SMEs across sectors (weighted percentages of respondents)

    • [4] During the 2009-12 period, about 15% of euro area SMEs that regarded bank loans as relevant to their funding were constrained in obtaining a bank loan.
    • In the second phase (until around March 2016), that percentage declined to approximately 12% and it has stabilised at around 8% in recent years (see Chart 3).
    • The share of financially constrained firms varied by firm size, category and country.
    • SMEs tended to more frequently report that they were financially constrained than large companies, although the percentages have declined over time (see Chart 3).
    • those in business for ten years or more) tended to be considerably less financially constrained than young ones (existing for less than 10 years).
    • Chart 3 Financially constrained firms by age and size (weighted percentages of respondents)
    • For large firms, it is not only the degree of financial constraint that is less serious compared with SMEs, but also the form of the constraint.
    • Large companies more often reported being quantity constrained (i.e.
    • banks offering a limited amount of the requested credit) than SMEs, while outright rejections were much smaller for large firms compared with SMEs (see Chart 4).
    • Bank credit costs appeared negligible in determining financial constraints for all companies, reflecting the significant extent of monetary policy accommodation since 2009.

3 Effects of unconventional monetary policy

  • In response to the weak economic conditions prevailing in the euro area, several monetary policy stimulus measures have been introduced over recent years. These have included a series of unconventional monetary policy measures, with the aim of restoring the transmission mechanism of monetary policy and bringing inflation back to the ECB’s price stability objective in a sustained way. These measures worked through several different channels, with some of the measures proving particularly useful in mitigating banking sector problems, restoring bank lending dynamics and sustaining financing conditions in general.[8] In particular:[9]
    • The Outright Monetary Transactions (OMT) programme was launched in the summer of 2012. Once a programme is established by the European Stability Mechanism (ESM), the OMT programme enables the purchase of eligible sovereign bonds issued by euro area governments in order to address severe distortions in sovereign bond markets. While no purchase has yet been conducted under the OMT programme, its announcement helped to reduce the yields on sovereign bonds issued by fiscally-stressed countries immediately, sharply, and permanently.[10] Furthermore, by alleviating pressure on euro area banks holding such bonds, the announcement of the OMT programme helped to sustain lending.
    • Interest rates were lowered to negative territory in the summer of 2014, thus providing additional monetary stimulus.[11] Also, the ECB has repeatedly communicated its intention to keep short-term interest rates low for an extended period of time, with such forward guidance reinforcing the signalling channel of policy rate cuts.
    • The CSPP was first announced as part of a broader set of measures under the expanded APP in March 2016. It was launched in June 2016 to allow for large direct purchases of eligible (i.e. investment grade) bonds issued by companies based in the euro area.[12] The programme was aimed at reducing debt-financing costs for large firms which could issue such bonds as an alternative financing source to bank loans, thereby freeing up more loan supply for smaller firms.[13]
    • Several rounds of TLTROs were launched to further foster corporate lending. The amounts that credit institutions could borrow as part of these operations were linked to their eligible credit granted to euro area-resident non-financial corporations and households, excluding lending for house purchases, in all currencies. The first series of TLTROs (TLTRO I) was announced in June 2014 and implemented in September 2014. The second series (TLTRO II) was announced in March 2016 and implemented in June 2016. Finally, a third series of TLTROs (TLTRO III) was announced in March 2019 and implemented starting from September 2019.[14]


    All of these measures shaped euro area firms’ perceptions of the availability of external finance (see Charts 5 and 6). Chart 5 Availability of external financing instruments for SMEs (net percentages of respondents for which the respective instrument is relevant)
    Chart 6 Availability of external financing instruments for large firms (net percentages for which the respective instrument is relevant)

    • Against this background, the announcement of the OMT was specifically aimed at easing the financial market conditions in stressed countries and thereby indirectly improving access to finance in those countries.
    • [15] The programme represented a turning point in firms perceptions, a conclusion that is confirmed by econometric analysis.
    • [17] These rejections were influenced by the health of bank balance sheets, in particular by the presence of non-performing loans (NPLs).
    • This suggests that supply factors did play an important role in subdued credit in these countries.
    • Taken together, the above-mentioned empirical evidence lends support to the success of the ECBs UMP measures in improving the terms and conditions of bank credit to SMEs, consistent with the bank lending view of monetary policy transmission.
    • [19] Chart 7 Financially constrained SMEs in countries more affected by the debt crisis (weighted percentages of respondents)
    • [21] Access to other sources of finance beyond bank lending is also important for SMEs.
    • [22] Corporate bond purchases through the CSPP also contributed to an improvement in SMEs access to finance.
    • provide evidence for a funding expectations channel of monetary policy by looking at how SMEs decisions are affected by their expectations of future credit access.
    • [24] This funding expectations channel complemented the standard bank lending channel, under which monetary policy is transmitted to the real economy through changes in the level and composition of bank credit.
    • In particular, immediately after the policy announcements, expectations of future credit access improved relatively more for SMEs borrowing from banks that were expected to increase SME lending due to the policy measure.
    • Chart 8 UMP announcements and SMEs expectations of bank loan availability (net percentages of respondents for which bank loans are relevant)
    • Importantly, the reported evidence suggests that the non-standard measures worked through different channels and that their impact varied somewhat across countries.
    • In interpreting the results, it has to be kept in mind that isolating the effects of monetary policy is always challenging.
    • Furthermore, in the case of the research reviewed in this section, the non-standard nature of the measures for which a very limited number of episodes exists further complicates the identification process.

4 Financing patterns and financial behaviour

    • Despite the improvement in financing conditions and the policy measures implemented so far, some structural challenges for SMEs access to finance remain.
    • These challenges are mainly related to the fact that euro area firms still use a limited number of the available financing instruments.
    • It represents a snapshot of the financing options chosen by euro area firms after the developments described in the previous section.
    • The financing options of euro area enterprises are limited to a few instruments, mostly related to the banking sector.
    • Chart 9 Use of financing sources for euro area firms (weighted percentages over the period 2009-19)
    • Chart 10 shows the distribution of the number of financing sources used by SMEs and by large enterprises.
    • As predicted by the literature[26], the data show the limited diversification of financing sources of SMEs in contrast to large enterprises.
    • When looking at firms using four or more financing sources, the percentage of large enterprises is almost twice as high as for SMEs.
    • In order to establish a taxonomy of financing patterns, firms in the SAFE sample are grouped on the basis of their sources of finance using a cluster analysis.
    • The taxonomy provides a snapshot of the financing behaviour of euro area firms until the period just before the coronavirus crisis.
    • While the approach is by its nature related to a specific period, the analysis of survey replies in alternative periods, for instance April-September 2012, shows that firms displayed broadly similar financing patterns.
    • By contrast, SMEs tend to more often be in the clusters where flexible short-term debt or long-term bank loans are the main financing instruments.
    • Box 1 A taxonomy of financing patterns in the euro area: a cluster analysis approach Prepared by A. Ferrando and K. Bakowska The empirical analysis used to identify financing patterns for euro area enterprises is based on a cluster analysis approach similar to the research carried out by Moritz et al.
    • Being solely based on one round, the taxonomy provides a snapshot of the financing behaviour of euro area firms.
    • The different clusters are presented by starting with those that include several financing instruments, and moving towards clusters that use fewer financing options.
    • Cluster 8 (no external financing): The last cluster is the largest one, covering 38% of the total sample of firms.


    Table 1 Cluster comparison according to firm characteristics

    • Beyond these financing sources, vulnerable firms were more likely to receive funds through grants or subsidised bank loans.
    • By contrast, a high share of profitable firms was in the cluster no external financing, probably because they have high retained earnings.
    • They were more often using a variety of financial instruments, including market-based ones (mixed grants cluster).
    • Industrial firms were slightly more often in the cluster with more diversified financing options (mixed market cluster).
    • Overall, they are able to attract debt and long-term financing, given their ability to provide collateral to secure their debt.
    • Finally, firms in the services sector are less likely to use external financing instruments compared with firms in the other industries, with many being in the cluster related to asset-backed financing (mixed leasing/factoring).
    • An important indicator derived from the SAFE dataset is the degree of financing gap, defined as the difference between the change in demand and in the availability of external financing.

5 Real effects of financing patterns

    • In the SAFE survey, firms are asked about the use of both external and internal financing.
    • Firms mainly use their external financing for fixed investment and working capital financing.
    • [31] First, firms investing in fixed assets use several financing instruments, mostly consisting in banking products.
    • More than 60% of firms in the clusters with more financing options (mixed grants, mixed market and mainly bank loans) use finance for fixed investment.
    • Fourth, firms developing and launching new products or services tend to use a variety of financing products.
    • Chart 12 Purpose of financing as perceived by firms across financing clusters (percentages)
    • To further investigate the link between financing options and firms decisions in the real economy, a logistic regression model is run.
    • Table 2 reports the effects of the diversification of external funds by clusters on the purposes for which firms used financing.
    • [33] Focusing on the highest marginal effects, the results show that firms using more grants or long-term bank loans (i.e.
    • Also, the probability of a firm investing in working capital is 26% higher for firms in the trade credit financing cluster.
    • Table 2 Purposes of financing and diversification of financing instruments (marginal effects)

6 Conclusions

  • The analysis highlights some important effects of monetary policy decisions on SMEs’ access to finance over recent years.
    • First, monetary policy measures predominantly aimed at supporting bank credit are crucial for SMEs in the light of their dependence on bank credit as the main source of external finance.
    • Second, support for bank finance is particularly relevant for the funding of fixed investment by SMEs, which may play an important role in the transmission of monetary policy.
    • Third, from a structural point of view, initiatives taken at the EU or national levels to support access to market-based instruments are of the utmost importance. A diversification in sources of finance would facilitate the activity and the expansion of innovative firms in particular, while also generally making SMEs more resilient in situations where the supply of credit tends to dry up.

Do low interest rates hurt banks’ equity values?

Retrieved on: 
Wednesday, July 17, 2019

By Miguel Ampudia[1] The effects of interest rate surprises on banks are different when nominal interest rates are very low.

Key Points: 
  • By Miguel Ampudia[1] The effects of interest rate surprises on banks are different when nominal interest rates are very low.
  • When interest rates are very low, however, there is a reversal of this effect: at such times, negative rate surprises reduce banks stock prices.
  • But they also led to a debate regarding the effects of very low interest rates on the economy.
  • Recent evidence on the effect of very low interest rates on banks is mixed.
  • (2019), for instance, have found that negative interest rates reduce the net worth of some banks.
  • In this study, we complement existing evidence by focusing on the effect of very low interest rate on banks stock prices.

Identification of monetary policy shocks

    • So how can we distinguish between changes in banks equity values that are driven by the interest from those driven by underlying economic conditions?
    • The second challenge is that, if changes in interest rates are anticipated by financial markets, they will react in advance and it may be hard to observe any reaction at the time of a policy rate announcement.
    • We use this methodology to identify interest rate surprises around monetary policy announcements.
    • For each press statement released after an ECB Governing Council meeting,[2] we construct a short-term interest rate surprise.
    • The change in the EONIA swap rate between the start and end of the window represents the unexpected change in the level of the ECBs policy interest rate, i.e.
    • the monetary policy shock.

The impact of monetary policy surprises over time

    • In particular, we analyse the ability of surprises to explain changes in the stock price of banks in a 30-minute window around the release of the press statement.
    • We do so by conducting a regression analysis using our interest rate surprises.
    • In the first two periods, negative rate surprises had a positive effect on banks equity values, an effect that became stronger after the crisis started.
    • In this environment, negative rate surprises were detrimental to bank equity values.
    • We find that a 25 basis point negative surprise lowered bank equity values by 2.0% during this period.

The impact of monetary policy surprises across banks

    • While many of these direct channels have similar effects on banks profits whether rates are high or low, some do not.
    • In particular, the effect of interest rate surprises on net interest margins is likely to change in a very low interest rate environment.
    • In the analysis, we interact our rate surprises with the level of the deposit ratios of the banks in our sample (and also our sample sub-periods).
    • The coefficients of these interaction terms indicate how the relationship observed between interest rate surprises and stock returns depends on banks funding models: a positive coefficient indicates that the effect of negative rate surprises on banks stock prices is stronger for banks with high deposit ratios.
    • In normal times, illustrated in the left panel of the chart, negative rate surprises appear to benefit all banks in a similar way, irrespective of their funding structure.
    • A 100 basis point negative interest rate surprise raises the stock prices of banks by about 2 to 2.5%.
    • Specifically, during the very low and negative rate period, deposit-intensive banks exhibit much larger declines in their equity values in response to negative rate surprises than banks that rely less on deposit funding.


    Chart 2 Response of banks’ stock values to rate surprises: the role of deposits

Concluding remarks

    • During normal times, negative interest rate surprises have a positive effect on the stock prices of banks.
    • The research presented here shows that things are different when interest rates are very low or negative.
    • In such an environment, negative interest rate surprises seem to have a negative effect on banks stock prices.
    • Let us conclude where we started: low interest rates have many effects of the economy, not all of which operate through banks.
    • Heider et al., 2019) while others showing that negative rates may actually boost profits and lending by some banks (e.g.
    • This study complements existing evidence by documenting the effect of interest rate surprises on banks stock prices in low-interest rate environments.

References