Stealth Recapitalization and Bank Risk Taking: Evidence from TLTROs

Abstract

I study the transmission of unconventional monetary policy through an increase in bank net worth. I examine the ECB’s Targeted Long Term Refinancing Operations (TLTROs), which provided interest rate subsidized loans to banks. First, I measure the rate subsidy and document that it results in equity gains for banks facing high borrowing costs in the private market, especially low capitalized banks. Second, using loan-level data from a sample of thirty-three European banks, I show that weakly capitalized banks receiving TLTRO funding subsequently decreased their risky lending. The effect spills-over to asset classes not targeted by TLTROs and is largest for banks receiving higher interest rate subsidies. In contrast to previous evidence, these results support that subsidized funding can boost bank net worth and offset risk-shifting incentives of banks, resulting in improved ex-post stability of the financial sector. The differences in results can be potentially attributed to differences in asset-side and liability-side recapitalizations as well as the different frictions (limited liability/regulatory scrutiny) faced by weakly capitalized banks in each setting.