Federal Reserve study details LSAP spillovers on euro area bank capital and lending
A new Federal Reserve study finds that U.S. large-scale asset purchases (LSAPs) affect credit provision in the euro area. The research identifies an 'international bank capital channel' where LSAP shocks steepen the U.S. Treasury yield curve, leading to worsening capital ratios and reduced lending by less capitalized euro area banks.
The international bank capital channel
The study by Marco Graziano, Marius Koechlin, and Andreas Tischbirek uses bank-level supervisory data and high-frequency identified policy surprises to trace the impact of LSAPs through bank balance sheets.
It finds that the Federal Reserve's asset purchases influence euro area credit provision via an 'international bank capital channel' of unconventional monetary policy.
Specifically, an LSAP shock that leads to a steepening of the U.S. Treasury yield curve prompts a reduction in the Treasury positions of euro area banks.
This, in turn, worsens their capital ratios, particularly for less well-capitalized institutions, which then contract their lending relative to better-capitalized peers.
The authors highlight the role of revaluation effects and imperfect risk hedging.
Capital constraints and credit adjustment
The findings are consistent with an important role for revaluation effects on bank balance sheets.
Imperfect risk hedging by euro area banks against U.S. yield curve movements contributes to the observed capital ratio deterioration.
Furthermore, the study highlights credit provision as a key adjustment margin for banks operating near regulatory capital constraints.
This mechanism explains why less capitalized banks are more prone to contracting their lending in response to external shocks stemming from U.S. monetary policy.
Stimulating discussion, not policy
This research offers valuable insights into the complex international spillovers of unconventional monetary policy.
While preliminary, its findings are crucial for stimulating further discussion and critical comment within the economic policy community.
The paper underscores the need for continued exploration into how global financial cycles interact with domestic policy actions.