Stefano Fugazzi (ABC Economics) – The transmission of conventional monetary policy (e.g. varying interest rates) to retail lending rates has not changed during the sovereign debt crisis compared to the pre-crisis period, claim a pool of Bundesbank researchers in a paper published earlier this summer. Additionally, the research unit found evidence that the composition of the interest pass-through has changed. Easy conventional monetary policy reduced sovereign risk in peripheral countries and longer-term bank funding risk in peripheral and core countries, but was not effective in lowering spreads between lending rates and banks’ funding costs. This was not, or not as much, the case prior to the crisis.
Reasons for the altered transmission to banks’ markups could be:
- higher borrower risk (or banks’ risk perception),
- lower competition among banks as a consequence of crisis-induced mergers or insolvencies or the break down in cross-border banking, credit supply constraints,
- less risk taking due to a stricter regulatory environment or
- money market rates being near the zero lower bound.
Furthermore, the Bundesbank paper observes that unconventional monetary policy (e.g. an asset purchase programme) had comparable effects on bank lending rates (and the components of the interest pass-through) as conventional monetary policy. The effects can be explained with relatively large shocks rather than a strong transmission.
Below an ABC Economics exhibit trending the evolution of consumer and business confidence levels within the Euro Area since 2003.
The reader will observe that, although the transmission (“pass-through”) of monetary policy to the economy has come under scrutiny, both consumer and business confidence levels have rebounded from the lows recorded at the time of the collapse of Lehman Brother and subsequent to the burst of the Greek/Eurozone crisis.
ABC Economics argues that such improvement is attributable to the magnitude of the unconventional monetary policies undertaken by the European Central Bank rather than their effectiveness, a consideration that, overall, is consistent with Bundesbank’s i.e. the improvement can be explained with relatively large shocks (due to the magnitude of some of the measures announced by the ECB) rather than an efficient transmission of liquidity from the banking sector to the real economy (“pass-through effect”).