Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/210873
Authors: 
Byrne, David
Kelly, Robert
Year of Publication: 
2019
Series/Report no.: 
ESRB Working Paper Series 98
Abstract: 
The funding mix of European firms is weighted heavily towards bank credit, which underscores the importance of efficient pass-through of monetary policy actions to lending rates faced by firms. Euro area pass-through has shifted from being relatively homogenous to being fragmented and incomplete since the financial crisis. Distressed loan books are a crisis hangover with direct implications for profitability, hampering banks ability to supply credit and lower loan pricing in response to reductions in the policy rate. This paper presents a parsimonious model to decompose the cost of lending and highlight the role of asset quality in diminishing pass-through. Using bank-level data over the period 2008-2014, we empirically test the implications of the model. We show that a one percentage point increase in the impairment ratio lowering short run pass-through by 3 percent. We find that banks with severely impaired balance sheets do not adjust their loan pricing in response to changes in the policy rate at all. We derive a measure of the hidden bad loan problem, the NPL gap, which we define as the excess of non-performing loans over impaired loans. We show that it played a significant role in the fragmentation of euro area pass-through post-crisis.
Subjects: 
Monetary Policy Pass-through
Impaired Loans
Non-Performing Loans
Interest Rates
JEL: 
D43
E51
E52
E58
G21
Persistent Identifier of the first edition: 
ISBN: 
978-92-9472-112-9
Document Type: 
Working Paper

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