Sovereign stress and heterogeneous monetary transmission to bank lending in the euro area

Abstract

Is the transmission of monetary policy to bank lending heterogeneous across the euro area? This article employs bank and loan level data over the period 2007–2016 to test the bank lending channel of monetary policy by focusing on similar banks located in different countries. Results indicate the presence of heterogeneity in that the transmission of both conventional and unconventional monetary policy to bank lending appears to be weaker for banks located in countries more exposed to the sovereign debt crisis. Exposure to sovereign risk is identified as a key source of heterogeneity: within sovereign stressed countries, banks with higher sovereign exposures react to monetary easing by expanding lending by less than banks with lower exposures. These findings add to existing evidence on the impact of sovereign risk on credit supply and establish a direct link between banks’ sovereign exposure and cross-country heterogeneity in the transmission of monetary policy to bank lending in the euro area.