سیاست پولی و بانک ها در منطقه یورو: جریان دو بحران

The paper is a narrative on monetary policy and the banking sector during the two recent euro area recessions. It shows that while in the two episodes of recession and financial stress the ECB acted aggressively providing liquidity to banks, the second recession, unlike the first, has been characterized by an abnormal decline of loans with respect to both real economic activity and the monetary aggregates. It conjectures that this fact is explained by the postponement of the adjustment in the banking sector. It shows that euro area banks, over the 2008–2012 period, did not change neither the capital to asset ratio nor the size of their balance sheet relative to GDP keeping them at the pre-crisis level. The paper also describes other aspects of banks’ balance sheet adjustment during the two crises pointing to a progressive dismantling of financial integration involving the inter-bank market since the first crisis and the market for government bonds since the second.

This paper is a narrative on the monetary policy of the European Central Bank (ECB) in the period 2008–2012 with a specific focus on liquidity operations and the dynamics of the financial sector. Rather than taking the perspective of single countries within the euro-zone [which has been the focus of much commentary since the crisis] I will look at the euro area economy as a whole. Analysis of the collective performance of the union is interesting per se, notwithstanding the heterogeneity it may hide, and is a starting point for understanding the effect of the combination of national and federal policies implemented since 2008. My narrative starts from the observation that the euro area, unlike the US, experienced a second recession after the global downturn. Since late 2007, the euro area has seen a global financial crisis, a major recession, the sovereign debt crisis and a second recession which followed a brief recovery in 2009–2011. While the first euro area recession was almost coincident with that of the US (see CEPR and NBER dating) and both economies started to recover at the same time, the second recession is specific to the euro area, a rare decoupling of the US and European business cycles in post-war history (see Reichlin, 2005). As I write now, some signs of a timid recovery are eventually appearing in the most recent data releases (see www.now-casting.com). However, the loss of output and employment in the last five years has been unprecedented, as has the stress in the financial sector. The damage from these episodes will not be easily repaired and is likely to overhang the recovery. The timing of the recessions and the extreme episodes of financial stress are not identical although there is a significant overlap. In both periods the European Central Bank (ECB) aggressively injected liquidity into the banking sector in an effort to avoid its collapse due to the paralysis of the inter-bank market. The key non-standard monetary policy measures taken by the ECB were liquidity operations, i.e. repo loans against collateral at a fixed rate for up to one year since 2009, and up to three year since 2011 (the so-called Long Term Refinancing Operations – LTRO). As with the quantitative easing measures adopted by other central banks, these operations had the effect of increasing the size of the balance sheet of the euro-system of central banks (ESCB) and increasing its importance as a financial intermediary. Given the predominance of banks as a channel of financial intermediation in Europe, the ECB designed its policy so as to deal directly with banks and focused, in particular, on replacing the wholesale funding market which had come almost to a stop after the collapse of Lehman Brothers in the fall of 2008. As Tommaso Padoa Schioppa correctly anticipated (Padoa Schioppa, 2004) and contrary to claims by some before the crisis, the euro-system proved to be sufficiently robust to be able to face an inter-bank run by providing emergency liquidity and adopting what he called a ‘market operation approach’ to its role as lender of last resort. In the first phase of the crisis, this approach was not only successful in preventing a collapse of the financial system, but also had a significant positive effect on the volume of bank lending and on the real economy (Lenza et al., 2010 and Giannone et al., 2012). In this paper I report data which suggest that this was not the case in the second phase of the crisis when, although the volume of the long term refinancing operations increased and their horizon lengthened to three years, bank lending remained unusually weak, even when taking into account the decline in industrial production and the dynamics of M3. The correlation between central bank liquidity provision and bank lending has been different in the two recessions, as has that between bank lending and the real economy. This suggests that the transmission mechanism of non-standard monetary policies was different between the two episodes and that in the second crisis these policies lost their effectiveness. In an attempt to formulate conjectures about this fact, this paper examines data on banks’ assets and liabilities as well as on central banks’ actions between 2008 and 2012 in order to identify differences between the two crises. In the first section I will briefly describe ECB action. In the second I will report data on the key characteristics of the euro area financial system. I will then review the banks’ balance sheet adjustment during the two crises in Section 3 and finally, in Section 4, I will discuss the nexus between ECB liquidity policies and banks’ behavior.

The aim of this paper has been to describe the nexus between ECB policy, banks’ balance sheet dynamics and loans to the real economy during the two crises experienced by the euro area economy since 2008. The question I addressed is why ECB non-standard monetary policies implemented during the period are associated with a relatively stable level of bank lending during the global recession and recovery of 2008–2010, but a dramatic decline in bank lending, beyond the decline in real economic activity and deposits, during the recession which started in 2011. This is despite the fact that ECB action through long term refinancing operations with banks has been forceful in both cases and even more aggressive during the second crisis. The analysis of the central bank and banking sector balance sheets shows that there has been a progressive substitution of inter-bank funding by provision of central bank liquidity but no adjustment of capital ratios and of the size of their balance sheet in relation to GDP since the crisis. In the first recession, the change in composition of banks’ assets and liabilities was a decline in the non-domestic component and relative stability in the domestic component, including loans. Banks, even if under-capitalized, kept the loans in line with industrial production (which experienced a similar decline in growth). In the second recession, the asset side of the banks’ balance sheet has seen a decline in loans which is unusual even accounting for weak economic activity and is not in line with the behavior of deposits. At the same time banks have increased their holdings of domestic government bonds and seen a drop in non-domestic securities in general. This narrative suggests a few conjectures on the role of the financial sector in the second euro area recession and on the effectiveness of ECB policies. The first crisis had the characteristics of a classic run in the inter-bank market with a consequent shortage of liquidity. The ECB’s policy in response was successful. However, the same tools were not appropriate to deal with solvency issues. Given the absence of tools at the European level to deal with solvency we have seen some banks becoming dependent on ECB liquidity provision, as well as a shift from loans to government bonds partly to acquire collateral to be used in repos with the ECB. The fact that euro area banks, unlike those in the US, were not recapitalized in the first phase of the crisis is likely to be an important explanatory factor in relation to the second recession in the euro area. In this paper we have purposely considered the aggregate euro area economy rather than single countries first, because the mandate of the ECB is to stabilize the aggregate and, secondly, because the dynamics of the euro area in aggregate can be more meaningfully compared with the US than those of a single country in the union. However, the home bias in government bond investments by banks has the important implication that banks in different countries have different risks associated with them. This has led to a cross-country heterogeneity in retail interest rates which has progressively made monetary policy with respect to the euro area periphery ineffective and generated a vicious cycle between bank weakness, sovereign debt and recession. This narrative suggests also that the four characteristics of the euro area financial system – bank dominated corporate finance, dependence on wholesale funding markets, cross-border financial integration in wholesale but not in retail, and the key role of banks as intermediaries in the government bond markets – make the system sensitive to shocks. This fragility comes from informational asymmetries which lead to counterparty risks and contagion between bad and good institutions, to sudden interruptions in cross-border funding which in turn lead to a close correlation between sovereign and bank risks. To address these weaknesses the euro area needs tools to deal with underlying solvency problems and with the scarcity of safe assets which is the consequence of the financial crisis. The central bank, acting through liquidity provision tools, cannot possibly solve this problem alone and may actually make it worse.