Is bank resilience affected by unconventional monetary policy in the Euro area?

Abstract

This paper examines whether euro area unconventional monetary policies have influenced the overall resilience of the banking industry. We proxy bank resilience with a Z-score measure that reflects the size of banks’ loss-absorbing buffers. We employ two alternative strategies to construct instruments that allow us to identify the effect of monetary policy in this context. First, within a two-stage least squares framework, we rely on ECB balance sheet data to capture the effect of the broad array of programmes used by the ECB to implement quantitative easing, while we control for the effect of conventional and negative, or very low, interest rate policy. Second, relying on high-frequency identification methods on narrow time windows around ECB policy announcements, we compute three factors reflecting different types of monetary policy surprises and examine their impact on bank resilience. With both methodologies we find that loosening the monetary policy stance through UMPs had an overall positive impact on euro-area banks’ shock absorbing buffers. The first approach, the only one that allows us to consider the level of interest rates, suggests that such effect is moderated when policy rates approach and breach the nominal zero-lower bound. The second strategy, which allows us to analyse forward guidance surprises, indicates that looser forward guidance has a positive impact on resilience. Balance sheet easing policies also seem to enhance resilience in the full sample, according to both strategies. The results are heterogeneous across subsamples, with contrasts between banks headquartered in core countries of the euro area vis-à-vis banks in the periphery of the euro-area. The contours of this heterogeneity differ in both methodologies and shows that balance sheet easing policies is detrimental for euro-area periphery banks. We also study the differential impact of monetary policy tools on banks, depending on their specific business model and their strength (i.e., their position within the distribution of loss-absorbing buffers); and the timing and persistence of monetary policy effects, which also varies with policy tools and jurisdictions.