Heterogeneity, monetary policy and banks’ balance sheets: evidence from Euro area countries

Abstract

We find that during the sample period 1999–2011 monetary policy easing in the Euro area has favoured loan provision relative to other banks’ activities in Germany, Italy and France, but not in Spain with a largest extent of unobserved heterogeneity in France and Italy. The impact on the balance sheets of banks also operates through size in Germany, Italy and France; liquidity in Germany; and capital in Spain. During the financial crisis, the direct impact of monetary easing on loan provisions relative to other assets has decreased in Germany and France, while its indirect impact has increased for smaller banks in France and less liquid banks in Germany. These results suggest that monetary policy easing has supported relatively more French small banks and German banks with liquidity constraints.