Unconventional Monetary Policy and Bank Lending Relationships

Abstract

How do banks transmit long-term central bank liquidity injections to borrowers? We exploit unique variation in how the ECB’s 2011-12 Long-Term Refinancing Operations (LTROs) affected lending to firms discontinuously across credit ratings (within banks) to make four contributions. (i) We show the LTROs induced increased bank lending to firms in France, including to SMEs, an elusive policy objective. (ii) We uncover important heterogeneity: banks pass through LTRO liquidity very differently to multi- bank firms than they do to firms with only one bank. (iii) Differences in liquidity transmission map to archetypal lending types: single-bank firms receive relationship lending, and these firms invest and grow in response, while multi-bank firms receive transactions-style lending and do not increase their investment. (iv) While the majority of the effect flows to firms whose loans are policy-eligible, we identify a spillover (onto multi-bank firms only) that appears to be driven by bank competition for borrowers.