Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/154398 
Year of Publication: 
2016
Series/Report no.: 
ECB Working Paper No. 1965
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper sheds light on how recent financial tensions in the euro area were ultimately reflected in bank interest rate setting. We make two new contributions. First, we develop a theoretical model capturing banks financing and the rate setting choices. Banks in the model can finance themselves through deposits, on the money market and/or by issuing bonds. Second, we assemble a novel database and put our model to test. Our model extends that of Gambacorta (2004), as we formalise banks' decision to issue debt endogenously. Gambacorta's analysis was conducted for Italian banks and did not include the recent financial crisis. Instead, we focus our analysis on the Great Recession period (July 2007 to October 2014) and euro area banks. From a monetary policy perspective, both our theoretical model and the empirical results provide useful information on the impact of some of the measures introduced by the ECB during the financial crisis. First, the ECB introduced specific measures to alleviate tensions in money markets. To the extent that these measures fostered stability in money markets, and reduced the volatility of money market rates, this paper shows that they were also channelled to bank rates. Second, the ECB also introduced measures to address tensions in bond markets. Our results also show that having access to debt financing has important implications for bank rate setting.
Subjects: 
bank financing
bank interest rate setting
non-standard monetary policy and euro area crisis
JEL: 
C32
E43
E52
E58
G01
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-2213-5
Document Type: 
Working Paper

Files in This Item:
File
Size
665.75 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.