The .nancial crisis which surfaced in August 2007 has highlighted the vulnerability of .nancial intermediaries, and more speci.cally of the banking system, at least along two interrelated dimensions. On the one hand, faced with the risk of insolvency due to the erosion of their capital base after heavy losses, banks have been in need of raising fresh capital, whether through private investors or government aid programmes. On the other hand, banks have experienced di¢ culties in raising funds at medium and long-term as well as at short-term: inter alia, spreads on bank bonds increased to unprecedented levels, while Libor-OIS spreads in the inter-bank money markets also reached historical peaks, especially following the demise of Lehman Brothers, the US investment bank, in September 2008. Moreover, banks.ability to securitise their loans and transfer credit risk o¤ their balance sheet was seriously disrupted adding further strains on their access to funding.
The mounting woes of the banking system implied a signi.cant pressure on banks to contract their balance sheets and, ultimately, in a reduction of credit. For example, according to the IMF (2009), the write-downs on securitised assets and charge-o¤s on banks.loan books could result in a disorderly deleveraging scenario through which without further capital injections from governments and private investors, the credit growth could shrink signi.cantly. Indeed, in the euro area, the .ows of credit to non-.nancial corporations and households began to signi.cantly abate towards the end of 2008, which apart from the typical demand- driven reaction to a downturn in the business cycle might to some extent also derive from problems related directly to banks.capital positions and their access to funding.
For example, the results of the ECB bank lending survey have pointed toward a combination of demand-side and supply-side factors contributing to the deceleration of the growth rate of loans to households and .rms in the euro area.1 Moreover, since the euro area .nancial system is relatively bank-centred compared, for instance, to the United States, it is relevant to assess whether there exists a signi.cant relation between bank loans extended to the non-.nancial private sector and real activity. From a monetary policy viewpoint, the di¢ culties related to bank balance sheets arising in the context of the .nancial crisis have raised concerns about the e¤ectiveness with which monetary policy decisions are transmitted to the real side of the economy via its impact on banking sector conditions.
Monetary policy may a¤ect real economic activity, and ultimately in.ation, via its impact on the banking sector through a number of transmission channels.2 One transmission channel a¤ected by bank behaviour is the degree and speed with which banks pass on changes in policy rates (.interest rate channel.). It has been shown that banks tend to adjust only sluggishly their lending rates in response to changes in monetary policy rates. The stickiness of bank rates has been found to depend among other things on the .nancial structure and the degree of competition within the banking sector as well as on competition from market-based sources.3
Another transmission channel often cited in the literature and having received increasing attention over the past two decades is the .credit channel.. According to this view, owing to informational asymmetries and principal-agent problems between banks and their borrowers, monetary policy may impact on the supply of loans and eventually on economic activity and in.ation. This could, for example, be the case if following a monetary policy tightening certain banks face balance sheet constraints, such as lower liquidity or capital holdings, and hence may choose to restrain lending, as prescribed by the .bank lending channel. (or .narrow credit channel.).4 Monetary policy via its e¤ect on the cash .ows of potential borrowers and on the value of their collateral may likewise in.uence the creditworthiness of bank borrowers leading to a change in their external .nancing premium charged by the banks. This, in turn, may induce banks to alter their supply of loans to these borrowers (the .broad credit channel.).5
Furthermore, bank credit has also been shown to be related to the boom and bust of economic cycles, for example as evidenced by the correlation between credit cycles and assets cycles. The latter fact is related to what has recently been labelled the .risk-taking.channel of monetary policy. This channel builds on the notion that monetary policy may amplify the procyclical nature of bank (and non-bank) intermediation through the impact it may have on the pricing, management and perception of risk by .nancial intermediaries