Extensive survey about the influence of unconventional monetary policy measures on loan supply

Extensive Survey about the Influence of Unconventional

Monetary Policy Measures on Loan Supply

Student: Ruben Hekster Student Number: 10356134 Supervisor: Koen Vermeylen

Study program: BSc Economics and Business Specialization: Economics and Finance

Table of contents

1. Introduction ……… p. 3

2. Literature review

2.1 Definition of the Credit Channel ……… p. 4 2.2 Credit Channel in the Eurozone………. p. 8 2.3 Unconventional Monetary Policies of the European Central Bank ……… p. 9 3. Empirical Research and Results……… p. 11 4. Conclusion……… ……….. p. 27 5. Bibliography……… p. 28

1. Introduction

The European sovereign debt crisis has had serious consequences for the Eurozone, in terms of economic activity and growth. In order to return onto a pre-crisis growth level, the European Central Bank (ECB) has mainly decreased short term interest rates, their most used policy measure (ECB, 2015). Instead of boosting investment, stimulus has been hard to accomplish. With interest rates at their zero lower bound, the ECB was forced to take unconventional monetary policy measures. These measures were more severe and direct than changing the interest rate level.

The global financial crisis has led Central Banks worldwide to undertake these steps to avoid a deep recession. Due to the fact that these policies are uncommon, the outcome is not pre-determined. Mario Draghi, the president of the ECB, announced a Quantitative Easing programme on January 22nd, 2015. This is never done before by the ECB. With a long period of mediocre growth in mind, this could be his last resort in an effort to reinstall confidence in the European economy. This paper will research the outcome of this decision, and will focus on the impact on lending activity by

European commercial banks. Because lending is needed by small and medium sized firms to generate employment and prosperity, it is a key indicator of economic recovery. This paper therefore serves the following research question : Do unconventional monetary policy measures by the European Central Bank, after the crisis have a significant impact on the loan supply of commercial banks in the

Eurozone? A first glance at this topic expressed the necessity of breaking down the research in two separate questions. One about the channel through which a bank changes behavior in case of a change in policy, and one about the influence of unconventional monetary policy on this channel.

So that led to the following two hypotheses:

1- Unconventional monetary policy decreases the external finance premium 2- Quantitative easing in the Euro zone increases loan supply

I will test these hypotheses by doing an extensive literature review and by bringing forward the relevant statistics that are useful in testing this. The data used in this paper will be retrieved from the website of the European Central Bank (ECB), other papers and Datastream. From the ECB website a large part of the Bank Lending Survey (BLS) will be used. This is a programme which the ECB conducts since September 2002, to measure the willingness to lend of banks in the Euro area. They use these surveys as well for their own research purposes like de Santis and Paries (2013). This paper does not concern an econometric analysis because the datasets used are very recent, and the aim of this paper is to analyze the effect of very recent measures on bank credit.

The literature concerning this research question consists roughly of two sorts: the earlier papers around the theme “credit supply channel’ discuss the pre-crisis era, and is mainly about the influence of an interest rate increase on the credit channel. The more recent papers discuss the effects of unconventional monetary policy on this lending channel, like the quantitative easing programmes of the United States, Japan and the United Kingdom. However, the quantitative easing measures performed earlier by the above mentioned central banks, are not a proper criterion for the Euro area economy. The simple reason is that governmental and financial institutions differ a lot across these regions. Another remark is that instead of policy measures that are aimed on tempering the economy, these most recent papers concern policies that are meant to have a strong incentive to boost loan supply, and so stimulating the economy.

This paper contributes to the existing literature by examining central bank policy implications when interest rates are at the zero lower bound. This forces central banks to deviate from setting the short term interest rate as main policy instrument, but instead conducting other measures like asset

purchase programmes. The amount of research on this topic is very thin because it is a very recent topic. There have been several researches into earlier unconventional policies, but the outcome of those papers may be biased, because they were written at times of financial stress making it harder to attribute increase in lending specifically to new policy measures. The paper is organized as follows: The literature review of Section 2 is divided into three parts. Section 2.1 will give a profound definition of the credit channel addressed in this research, Section 2.2 will try to explore some first signs of the existence of this credit channel in the Eurozone and Section 2.3 will explain on the different policy stances the ECB is capable of. Section 3 sets outs the statistical data and empirical results that are needed to form an answer about the research question in. Finally Section 4 will end with a conclusion.

Section 2.1 Defining the Credit Channel

To answer the research question regarding loan supply we first must define what the channel entails that influences the supply. This consists of the ‘credit channel’, firstly thoroughly defined by Kashyap and Stein (1994). The credit channel defines the monetary policy transmission mechanism by

separating monetary policy transmission into the simpler and better known “money view” and the “lending view’. Kashyap and Stein begin by setting a polar world, where there are only two asset classes, namely money and bonds. The banking sector’s only role has to do with the liability side of its balance sheet, they can create money by issuing demand deposits. On their asset side, they just invest in bonds, just like the households. In this world, the transmission system consists of change in reserves affecting real interest rates. This means: a decrease in reserves reduces the banks’ ability to issue demand deposits. This implies that banks have to hold on fewer bonds. Thus the household sector must hold less money and more bonds. This lowers the price of bonds, increasing the interest rate. These are inversely related variables. The change in interest rate can have a real effect on investment.

Contrasting this money view of monetary policy transmission mechanism, which has the two asset feature as the main characteristic, they introduce the lending view, when the two asset

simplification is inappropriate in a specific sense. Leaving the two-asset world, they state a three asset world including; money, publicly issued bonds and intermediated “loans’. These loans must be accounted for separately when analyzing the impact of monetary policy shocks. In addition to creating money, they can now make loans, which the households cannot (Kashyap and Stein, 1994).

So, instead of solely affecting the real interest rate through monetary policy, they can also affect the independent supply of intermediated loans. Furthermore, they elaborate on a few of important points that need to be added to the lending view. The impact of monetary policy on the supply on intermediated loans does not hinges on the real quantity issued, but on the relative price of a loan compared to the price of a bond. Kashyap and Stein illustrate this statement with an extreme example:

“Until now we have separated the money view and the lending view. Consider the money view, where we have only money and bonds. Assume that households view these two asset classes as near perfect substitutes. In that case, a decrease in reserves leads to a decline in money supply from the bank sector will have a minimized impact on the real interest rate of publicly held bonds. Thus this money channel is very weak. However, this decrease in reserves can have an impact if the banks cut off the loan supply. Now the cost of a loan will rise relative to that of a bond, and firms that rely on bank lending will cut back investment, channeling the monetary policy. Note that we emphasize the relative cost of a loan compared to a bond, and not the absolute rationing in the case of a decrease in money supply. This does not mean that shifts in bank loan supply may be accompanied by variations in the degree of rationing, but this is not necessary for there to be a meaningful lending channel” (Kashyap and Stein, 1995, p. 222).

The critical assumption to build further on the lending view described by Kashyap and Stein, is that loans and bonds are imperfect substitutes. In the next part this assumption will be confirmed according to the earlier paper of Bernanke and Blindler (1988), in which they state that the traditional textbook IS-LM models, using the simple “money view’, thus treating money and credit

symmetrically, and putting all of the bonds, loans and other debt instruments in a bond market category, must permit a more balanced treatment.

They provide a theoretical reason and an empirical reason for a more balanced treatment. The theoretical reason is the importance of financial intermediation in the provision of credit. Because these intermediaries can finance activities that cannot be financed in the anonymous auction market of bonds, loans by banks or other intermediaries acquire a special status. If these intermediated loans are reduced, whether it is by rationing or relative price to bonds, aggregate supply and demand are affected.

An empirical explanation brings forward the numerous documentation of the instability of econometric money-demand equations; Bernanke and Blindler see this as a product of deregulation and innovation by financial intermediaries, thus leading to a reduced utility of money as a measure of central bank policy. Bernanke and Blinder model this importance of imperfect substitutability of bonds and loans by extending the IS-LM framework in the three asset world, with money, bonds and intermediated loans. The conclusion should be that central bank policy cannot only be based on the ‘money view’ but has to take the intermediated loans into account.

Now, why is this distinction important? Firstly, if the lending view is correct, monetary policy can have an effect on investment and aggregate activity without moving open-market rates. Secondly, standard investment and inventory models, which typically use open-market rates as a measure of cost financing, may give a misleading picture of the extent to which different sectors are directly affected by monetary policy. Thirdly, the quantitative importance of the lending channel is likely to be sensitive to a number of institutional characteristics of the financial markets (rise of “non-bank intermediaries”) such that this might influence the potency of monetary policy. Finally, monetary policy can have distributional consequences that would not arise if policy were solely transmitted through a money-based channel. This a brief summary of argument brought forward by Kashyap and Stein, stressing the importance of the lending view.

To continue, the next part of the paper examines the answers to the following questions, as stated by Kashyap and Stein (1994, p. 223), which need to be answered to pursue our analysis:

1. Which micro foundations are required for a distinct lending channel to exist? 2. Is there any evidence that supports the existence of a distinct lending channel?

Kashyap and Stein formulate the micro foundations according to three conditions, extracted from the Bernanke and Blindler paper:

1.1 Intermediated loans and open-market bonds must not be perfect substitutes for some firms on the liability side of the balance sheet.

1.2 By changing the quantity of reserves available to the banking system, the Central Bank* must be able to affect the supply of intermediated loans.

1.3 There must be some form of imperfect price adjustment that prevents any monetary shock from being neutral. Because if price would adjust frictionlessly, bank corporate balance sheets would remain unaltered in real terms. There would be no effect through either a lending channel or the conventional money channel. (This condition is rather empirical, and therefore discussed superficially in order not to wander off topic.)

A first observation is that relative small firms do not have easy access to the bond market, thus being constrained to intermediated loans. Kashyap and Stein base their argument on US data of Small and Medium sized Enterprises (SME’s). For the sake of simplification, this paper will assume the same to be true for continental Europe, taking the similarity of the financial environment in account.

Furthermore, there are some lock-in effects inherent to financial intermediation. The lending bank has an informational monopoly on its client. This serves the impact of monetary policy in a positive way. Research concludes some firms are indeed dependent on intermediated loans rather than bonds so you cannot treat them as perfect substitutes.

The second condition answers the question; Is a central bank able to affect loan supply through a change in bank reserves? Kashyap and Stein identify four factors that could contribute:

1.2a) The existence of nonbank intermediaries: Kashyap and Stein use US data from the Quarterly Financial Report to answer this question, and conclude that SME’s are particularly dependent on bank intermediaries. Because firstly, banks have to be an intermediary since there is a synergy between deposit taking and loan making. Bank perform namely a “liquidity transformation role’, in a sense that

*Kashyap and Stein mention the Federal Reserve here, but since the analysis has to be comprehensive for the Eurozone, it is generalized to a main Central Bank.

they want to transform an illiquid asset in a liquid asset. This is not the case for nonbank

intermediaries. Secondly, a regulatory innovation also contributes to the mitigation of risky nonbank intermediaries, by risk based capital requirements. This stimulates a combination of deposit taking and loan making. The existence of non-bank intermediaries could have a negative effect on the credit channel, but this is mitigated since bank have advantageous circumstances to fulfill this role.

1.2b) Banks’ ability to react to changes in reserves by adjusting their holdings of securities rather than loans: To accommodate a change in reserve requirements, a bank can do three things. Firstly, cut loans, secondly; sell bonds, and thirdly attract commercial deposits. To react in order to change loan supply, banks cannot be indifferent between bonds and loans, because then every shock will be accommodated by adjusting the bond portfolio, which will be relatively more liquid then its loan portfolio. But since there is a difference in interest in bonds and loans, loans yielding higher interest, there will be an optimal bond portfolio level for every amount of outstanding loans. Therefore, the bank will not be indifferent and has to accommodate a reserve shock by alternating loan levels. 1.2c) Banks’ ability to raise funds with nonreserveable forms of financing: suppose CD’s are perfectly elastic at current market rate, that is, a bank can issue as many CD’s as it wants without paying any premium. Well this is highly unlikely in practice because, large denomination CD’s are often not insured, so investors must be concerned about the quality of the issuing bank. The information asymmetries that arise, make the marginal cost of external financing an increasing function of the amount raised. Kashyap and Stein argue that in any case loans and CD’s are not perfect substitutes and base their argument on the criticizing a model of Romer and Romer (1990), where the assumption is made that there can’t exist a spread between loan and bond rates.

1.2d) The existence of risk-based capital requirements: they argue that if a bank is capital constrained, easing policy will not have the same expansionary effect an unconstrained bank would have. Because Bank X (constrained) will not lend anymore, since it is tied down, and the customers can’t switch frictionlessly between banks, Kashyap and Stein state easing policy may be ineffectual. This is an interesting point of view, since the recently sharpened Basel accords lay tightening rules on risk weighted capital. According to Kashyap and Stein, this would weaken the potency of monetary policy.

Summarizing those four factors, the Central Bank is capable of influencing the supply of intermediated loans by altering reserve requirements.

1.3) Imperfect price adjustment is a condition for any monetary policy measure to have real effects. The reasoning from the empirical literature on imperfect price adjustment is beyond the scope of this paper. However, Kashyap and Stein emphasize when analyzing the lending view, models should be used which assume limited participation of non-bank dependent firms in the lending market as a device to generate imperfect price adjustment, and models which provide a detailed account of intermediary portfolio choice.

2. Kashyap and Stein end with a large part on empirical evidence of the lending channel, beginning with describing the correlation between loans and inventories, which can be used to determine the outcome of policy effects on bank lending. They find that in tightening policy regimes, loan supply first rises to cope with the excess supply, and then gradually declines. Lending seems to move slower then aggregate money, at the same pace of output.

The larger part of their evidence consist of Vector Auto Regression models, which is a system of ordinary least square regressions, in which each of a set of variables is regressed on lagged values of both itself and the other variables in the set. VAR’s have proved to be a convenient method of summarizing the dynamic relationships among variables, since, once estimated, they can be used to simulate the response over time of any variable in the set to either an ‘’own’ disturbance or a disturbance to another variable in the system (Bernanke and Blindler, 1995).

Kashyap and Stein gave us a good insight into the lending view. Bernanke and Blindler focus apart from the imperfect substitutability between bonds and loans, also on the premium that exists on external funding. They define this extra cost as the external finance premium. This is a reflection of the deadweight costs associated with the principal-agent problem that typically exists between lenders and borrowers. Some examples of factors causing this costs are the lenders’ cost of screening, monitoring and collection.

This paper will continue on separating the overall credit channel in the balance sheet channel and the lending channel which is the focus of the paper of Bernanke and Blindler in the scope of the external finance premium. The balance sheet channel stresses the potential impact of changes in monetary policy on borrowers’ balance sheets, and income statements, including variables such as borrowers’ net worth, cash flow and liquid assets. The second linkage which they call the bank lending channel, focuses more narrowly on the possible effect of monetary policy actions on the supply of loans of depository institutions. One can further analyze the strength of these channels from the viewpoint of the firms, which will be done first and subsequently this analysis will be extended by looking at the effect of consumer behavior, like spending on housing and consumer durables.

Balance Sheet Channel

The balance sheet channel is based on the theoretical prediction that the external finance premium a borrower faces depends on the strength of his or hers financial position. A stronger financial position (higher net worth) gives the borrower the ability to provide collateral and to make down payments, reducing the potential conflict of interest with the lender. Since the external finance premium is thus linked to the terms of credit a borrower faces, the quality of a firms’ balance sheet should affect their spending and investment decisions. Bernanke and Blindler state direct and indirect consequences that follow a tightening monetary policy decision.

- Directly: First, rising interest rates increase the interest expense on short term and floating rate debt, which small and medium size firms rely on heavily to finance inventories and other working capital. Rising interest expense means less free cash flows, thus a weakened financial position.

Second, rising interest rates are associated with declining asset prices (As the price and interest of bonds in inversely related), which shrinks the value of the borrowers’ collateral.

- Indirectly: Consider a manufacturing firm producing goods for downstream customers. When a monetary tightening reduces spending of these customers, whether it be for cost-of-capital or balance sheet reasons, fixed costs like interest and wage payments, will not adjust in the short run. The resulting financing gap erodes net worth and creditworthiness over time.

In the event of an easing policy decision every variable that decrease would increase. The movement would be inversed.

Bank lending channel

Beyond its impact on the borrower’s balance sheet, monetary policy may also affect the external finance premium by shifting the supply of intermediated credit of course, particularly loans by commercial banks. If the supply of bank loans is disrupted for some reason, the bank-dependent borrowers are certain to incur costs of finding a new lender, and establishing a credit relationship. Bernanke and Blindler model this bank lending channel by suggesting that open market sales by the Fed, would drain reserves and hence deposits from the banking system, and that would limit the supply of bank loans by reducing banks’ access to loanable funds. A key assumption of this model is that banks cannot easily replace lost deposits with other sources of funds, such as certificate of deposits (CD’s) or new equity issues.

Now the analysis is extended to the behavior of the consumer and the credit channel. Credit-market frictions should also be relevant for spending on costly durable items such as automobiles and houses. Because the information asymmetries that exist between banks and firms, are the same regarding banks and consumers. A decrease in loan supply would also have a negative effect on consumer spending.

So far this paper has addressed the existence of credit channel, by leaving the traditional ‘money view’ of monetary policy and accommodating the lending view, which includes the influence of monetary policy on intermediated loans. A key point is the imperfect substitutability of loans and other sources of finance like bonds. Next to this imperfect substitutability, principal-agent problems

lead to an external finance premium. The movements of the external finance premium and the relative cost of loans to bonds, are key determinants of lending supply. Furthermore, we have separated the credit channel in the balance sheet channel and the bank lending channel. Empirical evidence supports the existence of a credit channel. This paper continues in examining the role of these determinants in the Eurozone.

Section 2.2 Credit Channel in the Euro zone

The economies of the Eurozone are very different. A key question to answer before analyzing the effect of unconventional monetary policy on lending conditions in the Eurozone is; does a credit channel exists in the Eurozone and what are the effects of the single Eurozone monetary policy on a heterogenous set of economies?

The credit channel is defined in section 2, and before continuing the research of the effect of

unconventional policy, the existence of a broad credit channel in the Euro area has to be confirmed. As policymakers would like to maintain stable inflation and real economic output at its potential, they are used to lean against the wind regarding measures against exogenous shocks. If a special credit channel exists in the Euro zone, this could have significant impact on aggregate output and economic activity.

Ciccarelli et al. (2013) structure their analysis on heterogeneity in two parts. They analyze in time of sovereign stress, like during the global financial crisis of 2008, and they discuss the

transmission mechanism at times before the crisis. According to this paper, the first signs of heterogeneity in the Eurozone became apparent during the unfolding of the crisis. They take the difference in amount of Credit Default Swaps (CDS) outstanding as measure of difference in perception of creditworthiness of states in the Eurozone. In the figure below one can see that the amount of insurance against default on credit (CDS) in Greece is significantly higher than the other member states. This is a first sign that there exists a great heterogeneity in Euro-countries.

Credit default swaps across euro zone countries (difference from the median).Note: The credit default swaps (CDS) are calculated for 10-year senior sovereign debt. The CDS for Greece, Ireland, Italy, Portugal and Spain are above the median and they define the group of countries under sovereign stress. The CDS for Austria, Belgium Finland, France, Germany and the Netherlands are below or equal to the median (Belgium) and define the group of other countries. The CDS for Greece is plotted on the same scale only until 2011:Q2. Source: Thomson Financial Datastream (In Ciccarelli et al.)

Ciccarelli et al. conclude that they found suggestive evidence that by providing ample public liquidity through the full allotment policy and the Long Term Refinancing Operations (LTRO’s), the Euro system was able to minimize the restrictions to private liquidity funding by effectively partly substituting the interbank market and, in turn, inducing a subsequent softening of lending conditions.

In terms of heterogeneity, they find that the transmission mechanism of monetary policy has changed with the crisis, with a strong amplification effect of the credit channel in countries under sovereign stress.

Altunbas et al. (2002) also find that the bank lending channel is stronger in undercapitalized banks. They conduct a research in France, Germany, Spain and Italy and find evidence that the credit channel is stronger in Italy and Spain.

De Santis and Surico (2013) contradict this view partly, because they find that the transmission mechanism is weak and homogenous in France and Spain but significant and heterogenous in Germany and Italy. Although they agree with the fact that the channel is stronger in smaller, thus undercapitalized banks. Gambacorta (2005) confirms this statement, because undercapitalized banks are perceived as more risky thus have less access to uninsured funds. They issue more short term loans, and on the liability side, they issue less deposits and raise less bonds. The credit channel is therefore stronger. Kishan and Opiela (2000) confirm this as well. The German and Italian banking environment is characterized by small cooperative and savings banks, in other words banks with less capital. It is thus reasonable that the credit channel is found to be more explicit in those two countries. Spain and France have a more competitive banking environment with a higher market concentration. Moreover, de Santis and Surico find that French savings banks are the most liquid; while German savings banks are the least liquid. The credit channel is heterogenous across typologies of banks in the same country, but is broadly homogenous within categories of banks in each country.

Section 2.3 Unconventional Monetary Policies of the European Central Bank

Ciccarelli et al. (2013) find in their paper that while the bank balance sheet channel has been to a large extent neutralized by the ECB interventions, they find that the lending channel is significant over the period 2008-2011 in stressed countries. They find that despite the interest rate cuts in times of the crisis, still great credit frictions persist for small firms. Therefore they conclude that the monetary policy actions adopted until the end of 2011 were insufficient to enlarge credit availability. Their analysis therefore supports the complementary actions that have been put in place, beginning with Open Market Operations and Long Term Refinancing Operations and eventually leading to

Quantitative Easing. Those means were specifically activated targeted to increase credit to small firms to reduce their external finance premia. Especially since November 2011, the ECB has begun

implementing some very intensely accommodative measures. Gambacorta and Rossi (2010) also justify this decision by stating that tight monetary policy has a larger effect on bank lending that easy monetary policy. Extra stimuli are thus needed.

Since the intensification of the financial crisis in September 2008, and against the background of rapidly receding inflationary pressures, the ECB has introduced monetary policy and liquidity management measures that are unprecedented in nature, scope and magnitude (ECB, 2009). These unconventional monetary policy measures began in October 2008 with the decision of the Governing Council to increase the size of the Long Term Refinancing Operations, repo agreements to ensure liquidity to commercial banks in the Eurozone. These LTRO’s were extended in 2010 and 2011, by providing longer maturities.

The ECB further intensified these unconventional measures by introducing the Securities Market Programme (SMP) in May 2010. The meaning of this programme was to ‘conduct

interventions in the euro area public and private debt securities markets, under a Securities Market Programme, to ensure depth and liquidity in those market segments which are dysfunctional. The objective of this programme is to address the malfunctioning of securities markets and to restore an appropriate monetary policy transmission mechanism.’ (ECB, May 2010). This programme is

included under the Open Market Operations of ECB measures, in which they intervene directly on the public market. The programme stopped at the end of March 2011, but resumed August 7th of 2011 due to severe deterioration of financial market conditions, because of the European sovereign debt crisis. On August 2nd 2012, the ECB terminated the SMP and began introducing Outright Monetary

Transactions (OMT).

OMT is considered by the European Central Bank once a European government asks for financial assistance. The Eurozone has established the European Stability Mechanism and the European Financial Stability Facility funds to meet the challenges of the European debt crisis. From these funds and from OMT, the European Central Bank can buy government-issued bonds that mature

in 1 to 3 years. The aim of this program is to prevent divergence in short term yields, and to ensure that the ECB’s monetary policy is transmitted equally to all Eurozone member countries.

To continue, on September 14th 2014, the ECB adopted a first asset-purchase programme, called the third covered bond purchase programme. It was implemented on the 20th October to ‘further enhance the transmission of monetary policy, facilitate credit provision to the euro area economy, generate positive spill-overs to other markets and, as a result, ease the ECB's monetary policy stance, and contribute to a return of inflation rates to levels closer to 2 %.’ (ECB website, 2015). Along this programme another asset purchase round was started November 21st 2014, called the Asset Backed Securities Programme, and this had the same goal as the covered bond programme. This will last for two years. According to the ECB website (2015) these asset-backed securities can help banks fulfill their main role, providing credit to the real economy. Selling asset-backed securities can provide banks with the necessary funds to supply new lending to the real economy.

Finally, at the beginning of 2015, economic growth was still mediocre and there existed danger of deflation. As can be observed in figure 1, where can be seen that inflation has decreased below the mandate inflation level of the ECB (nearly 2%), which is indicated by the red line in the figure, and almost turned into deflation, an inflation level below zero.

Figure 1: Harmonized Index of Consumer Prices (HICP) in the EMU

Figure 2: GDP growth Expenditure Approach, Gross Domestic Product, Total at Market Prices, Calendar Adjusted, SA, Change y/y

Source: Thomson Reuters Datastream

GDP growth had stalled as well, and did not top the 1%. The ECB announced therefore a final unconventional measure on January 22nd, 2015. This is widely known as Quantitative Easing, a programme already conducted by the Bank of England, the Federal Reserve and the Bank of Japan starting in 2009. On March 9th the ECB started to buy public sector securities under the official name of QE, ‘Public Sector Purchase Programme’. This consisted of 60 billion euros per month of nominal and inflation linked central government bonds and bonds issued by recognized agencies, international organizations and multilateral development banks in the euro area.

The difference between Quantitative Easing and OMT, is that QE has a main goal of injecting liquidity in the Eurozone economy, while OMT is aimed at preventing divergence of short term yields.

Figure 3: A brief timeline of the unconventional ECB policy measures, based on the ECB. Please note that programme terminations are not indicated.

Now all the unconventional policy measures are discussed, the next part will elaborate time series that regard lending data to form a grounded conclusion.

Section 3 Empirical Research and Results

In this section, data will be combined from Datastream and the ECB’s bank lending survey to base our conclusions regarding lending conditions. The bank lending survey for the Euro area was

launched in 2003. Its main objective was to enhance the knowledge of the financing conditions of the Euro area to help the ECB’s governing council assess monetary and economic developments on the basis of which they make monetary policy decisions. The survey is designed to complement existing statistics on loans and bank lending with information on supply and demand conditions and on the lending policies of the Euro area commercial banks. It disucsses issues such as the credit standards and an assessment of the demand for loans to enterprises and households.

It is addressed to senior loan officers of a representative sample of Euro area banks. In the survey round of the first quarter of 2015, 142 banks took part, representing all of the Euro area countries and takes into account the characteristics of their national banking structures (ECB, 2015).

This paper discusses the results for the five largest economies of the Euro area, namely Germany, Spain, France, Italy and the Netherlands. It is a good proxy for the rest of Europe. A reason

for this is that the same measurements of credit are used in these countries, so one can compare them and that makes it suitable for research purposes.

The structure of this section is as follows: first the Netherlands, Germany, France, Spain and Italy will be analyzed separately on basis of data retrieved from Datastream. Then the first hypothesis will be tested per country followed by the second hypothesis. This first part will be followed by an analysis of the Eurozone, based on data of Datastream as well. Finally, the ECB’s Bank Lending Survey will be discussed to form a complete representation of the research.

For each country; the following two hypotheses will be tested:

1. Unconventional monetary policy decreases external finance premium.

As a proxy for the external finance premium, several interest rates on loans will be used. This is done because an interest rate on a loan is a reflection of the information problems that exist between a lender and a borrower, thus conforming the definition of the external finance premium given in Section 2.

2. Quantitative easing in the Euro Zone increases loan supply.

To test this hypothesis, data on absolute loan supply will be used together with data on the growth rate of loan supply.

The data retrieved from Datastream, is dated from the 1st of January of 2011 and on, because according to the timeline in section 4, most of the unconventional policy measures of the ECB have been implemented in this period. The specific sorts of data retrieved can differ across member states. This can be attributed to the difference in measurement across the National Central Banks of the Euro system. The datasets are harmonized in specific sorts, as good as possible.

Netherlands

0 200 400 600 800 1000 1200 1400 1600 01 /01/2 011 01 /04/2 011 01 /07/2 011 01 /10/2 011 01 /01/2 012 01 /04/2 012 01 /07/2 012 01 /10/2 012 01 /01/2 013 01 /04/2 013 01 /0 7/ 2 01 3 01 /10/2 013 01 /01/2 014 01 /04/2 014 01 /07/2 014 01 /10/2 014 01 /01/2 015 01 /04/2 015 A m o u n ts * M ill io n e u ro s

Loans to NFC's

>1 mill, 1-5y <1 mill, 1-5y

Figure 3: Loan amounts to non-financial companies in the Netherlands. Amounts and maturities (Source: Datastream)

Figure 4: Loan rates to non-financial companies in the Netherlands; amounts and maturity. (Source: Datastream)

On basis of Figure 4, we can say that the external finance premium has indeed moderately lowered in the Netherlands, looking at the interest rates on variants of loans. The interest rate on loans higher than one million euro are higher than on loans of less than one million euro. This is a logical

consequence of the extra default risk that exists regarding higher loan amounts. At the right side of the graph we can see a clear downward trend with loans of less than one million euro and a maturity between one and five years.

In Figure 3, the spikes at the end of the years may be a consequence of extra lending around

Christmas. This can be seen in the graph because it is not seasonally adjusted. There is no clear trend in the graph, except for the fact that the last upward spike is higher than all the previous spikes. On basis of this figure, there can’t be concluded anything regarding the second hypothesis.

0 1 2 3 4 5 6 01 /01/2 011 01 /04/2 011 01 /07/2 011 01 /10/2 011 01 /01/2 012 01 /0 4/ 2 01 2 01 /07/2 012 01 /10/2 012 01 /01/2 013 01 /04/2 013 01 /07/2 013 01 /10/2 013 01 /01/2 014 01 /04/2 014 01 /07/2 014 01 /10/2 014 01 /01/2 015 01 /04/2 015 %

Loan rates to NFC's

> 1 mill, 1-5y < 1 mill, 1-5y > 1 mill, >1y < 1 mill, <5y > 1 mill, <5y

Germany

Figure 5: Loan rates to non-financial companies in Germany; amounts and maturity. (Source: Datastream)

On basis of the above graph of the loan rates to non-financial companies in Germany, it can be concluded that the external finance premium has indeed been lowered significantly. Loans under a million euros, with a maturity from 1 to 5 years (marked in light blue) have decreased in interest rate from near 4,5% to 3%. These loans are crucial for Small and Medium sized Enterprises. After the ECB introduced the Outright Monetary Transactions at the beginning of 2012, the interest rates began showing a clear downwards trend, indicating a flow-through of monetary policy.

2480000 2500000 2520000 2540000 2560000 2580000 2600000 2620000 2640000 2660000 2680000 2700000 01 /01/2 011 01 /05/2 011 01 /09/2 011 01 /01/2 012 01 /05/2 012 01 /09/2 012 01 /01/2 013 01 /05/2 013 01 /0 9/ 2 01 3 01 /01/2 014 01 /0 5/ 2 01 4 01 /09/2 014 01 /0 1/ 2 01 5

Total loans to enterprises and individuals

Amount * 1000 euros 0 0.5 1 1.5 2 2.5 3 3.5 4 4.55 01 /01/2 011 01 /04/2 011 01 /07/2 011 01 /10/2 011 01 /01/2 012 01 /04/2 012 01 /07/2 012 01 /10/2 012 01 /01/2 013 01 /04/2 013 01 /07/2 013 01 /10/2 013 01 /01/2 014 01 /04/2 014 01 /0 7/ 2 01 4 01 /10/2 014 01 /01/2 015 01 /04/2 015 %

Loan rates to NFC's

1-5y >5y <1y > 1 mill, 1-5y > 1 mill, >5y > 1 mill, <1y < 1 mill, 1-5y < 1 mill, <1y

Figure 6: Credit to non-financial companies in Germany, maturity below 1 year. (Source: Datastream)

Figure 7: Credit to non-financial companies in Germany, maturity above 5 years. (Source: Datastream)

Figure 8: Growth rate of amount of loans supplied to non-financial companies in Germany. (Source: Datastream)

The three graphs above show the amount of credit to non-financial companies in Germany, with maturities under one year and total loans to enterprises and individuals, and the growth rate of loans to NFC’s. The first two graphs do not show abnormal influences on lending, only from September 2009 and on. The last two graphs show the same dip around the beginning of 2015. What causes this dip, is unclear. Looking at the results of the graphs, there is no clear evidence of a growth in loan supply attributable to unconventional monetary policy of the ECB.

525 530 535 540 545 550 555 560 565 570 01 /01/2 011 01 /04/2 011 01 /07/2 011 01 /10/2 011 01 /01/2 012 01 /0 4/ 2 01 2 01 /0 7/ 2 01 2 01 /10/2 012 01 /01/2 013 01 /04/2 013 01 /07/2 013 01 /10/2 013 01 /01/2 014 01 /04/2 014 01 /07/2 014 01 /10/2 014 01 /01/2 015 01 /04/2 015 A m o u n ts * M ill io n e u ro s

Credit to NFC's

>5y -1 -0.5 0 0.5 1 1.5 2 2.5 01 /01/2 011 01 /04/2 011 01 /07/2 011 01 /10/2 011 01 /01/2 012 01 /04/2 012 01 /07/2 012 01 /10/2 012 01 /0 1/ 2 01 3 01 /04/2 013 01 /07/2 013 01 /10/2 013 01 /01/2 014 01 /04/2 014 01 /07/2 014 01 /10/2 014 01 /01/2 015 01 /0 4/ 2 01 5 %

Growth Rate Loans to NFC's

France

Figure 5: Loan rates to non-financial companies in France; amounts and maturity. (Source: Datastream)

Analyzing the graph above, it is right to conclude that there is enough evidence of a decrease in the external finance premium over the period where the ECB implemented unconventional monetary policy. The strongest sign leading to this conclusion is the simultaneous dip in rates on different loans, around October 2014. This marks the beginning of the asset purchase programmes of the ECB

mentioned in section 4.

Figure 6: The absolute amounts of Long- and Short term liabilities of non-financial companies in France. These liabilities consist of loans. (Source: Datastream)

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 01 /01/2 011 01 /04/2 011 01 /07/2 011 01 /10/2 011 01 /01/2 012 01 /04/2 012 01 /07/2 012 01 /10/2 012 01 /01/2 013 01 /04/2 013 01 /07/2 013 01 /10/2 013 01 /0 1/ 2 01 4 01 /04/2 014 01 /07/2 014 01 /10/2 014 01 /01/2 015 01 /04/2 015 %

Loan rates NFC's

> 1 mill, >5y > 1 mill, <1y < 1 mill, <1y < 0.25 mill 1100000 1150000 1200000 1250000 1300000 1350000 01 /02/2 011 01 /08/2 011 01 /02/2 012 01 /08/2 012 01 /02/2 013 01 /08/2 013 01 /02/2 014 01 /08/2 014

Long term Liabilities NFC's

(loans)

Amounts * 1000 euros 620000 640000 660000 680000 700000 720000 740000 760000 01 /02/2 011 01 /08/2 011 01 /02/2 012 01 /08/2 012 01 /02/2 013 01 /08/2 013 01 /02/2 014 01 /08/2 014

Short term Liabilities NFC's

(loans)

Amounts * 1000 euros

Figure 7: The absolute amounts of assets of the Main Financial Institutions to the private sector, which consist of loans. (Source: Datastream)

Figure six and seven denote the long- and short term liabilities of the non-financial companies of France, and total loans supplied to the private sector. All of these three graphs show a clear upward trend during the period of unconventional monetary policy of the ECB. Especially the total loans to the private sector increase a lot at the start of 2015, when the quantitative easing programme was announced. These graphs confirm the influence of unconventional monetary policy on loan supply in France. 1850000 1900000 1950000 2000000 2050000 2100000 2150000 01 /01/2 011 01 /04/2 011 01 /07/2 011 01 /10/2 011 01 /01/2 012 01 /04/2 012 01 /0 7/ 2 01 2 01 /10/2 012 01 /01/2 013 01 /04/2 013 01 /07/2 013 01 /10/2 013 01 /01/2 014 01 /04/2 014 01 /07/2 014 01 /10/2 014 01 /01/2 015

Loans private sector

Spain

Figure 8: Loan rates to non-financial companies in Spain; amounts and maturity. AVG denotes average (Source: Datastream)

A very clear downward trend can be read on the graph of the loan rates to NFCs in Spain. Therefore, the hypothesis of a decreased external finance premium holds for Spain. The slight upward deviation can be attributed to the consequences of the European sovereign debt crisis, when Spain was

considered a default risky member state. 0 1 2 3 4 5 6 7 8 01 /01/2 011 01 /04/2 011 01 /07/2 011 01 /10/2 011 01 /01/2 012 01 /04/2 012 01 /07/2 012 01 /10/2 012 01 /01/2 013 01 /04/2 013 01 /07/2 013 01 /10/2 013 01 /01/2 014 01 /04/2 014 01 /07/2 014 01 /10/2 014 01 /0 1/ 2 01 5 01 /04/2 015 %

Loan rates to NFC's; < 1 million

< 1 mill, <1y < 1 mill, 1-5y < 1 mill, >5y < 1 mill, AVG 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 01 /01/2 011 01 /08/2 011 01 /03/2 012 01 /10/2 012 01 /05/2 013 01 /12/2 013 01 /07/2 014 01 /02/2 015

Loans to NFC's, < 1 mill, <1y

Amounts * million euros 0 500 1000 1500 01 /01/2 011 01 /08/2 011 01 /03/2 012 01 /10/2 012 01 /05/2 013 01 /1 2/ 2 01 3 01 /07/2 014 01 /02/2 015

Loans to NFC's, < 1 mill,

1-5y

Amounts * million euros

Figure 9: Absolute amounts of loans to non-financial companies in Spain, across different amounts and maturities. (Source: Datastream)

The graphs above represent different loan amounts in Spain, ranging from under or above one million euro and different in maturity. There is no clear trend in these graphs or a clear spike that could indicate an unusual happening like an unconventional policy measure. This means that the second hypothesis, cannot be confirmed for Spain. The overall spikey feature can be attributed to the lack of seasonal adjustments meaning the data is not corrected for extra lending around Christmas and summer months. 0 100 200 300 400 01 /01/2 011 01 /07/2 011 01 /0 1/ 2 01 2 01 /07/2 012 01 /01/2 013 01 /07/2 013 01 /01/2 014 01 /07/2 014 01 /01/2 015

Loans to NFC's, < 1 mill, >5y

Amounts * million euros 0 1000 2000 3000 4000 01 /01/2 011 01 /07/2 011 01 /01/2 012 01 /07/2 012 01 /01/2 013 01 /07/2 013 01 /01/2 014 01 /07/2 014 01 /0 1/ 2 01 5

Loans to NFC's, > 1 mill, 1-5y

Amounts * million euros 0 10000 20000 30000 40000 01 /01/2 011 01 /07/2 011 01 /01/2 012 01 /07/2 012 01 /0 1/ 2 01 3 01 /07/2 013 01 /01/2 014 01 /07/2 014 01 /01/2 015

Loans to NFC's, > 1 mill, <1y

Amounts * million euros

Italy

Figure 10: Loan rates to non-financial companies in Italy; amounts and maturity. (Source: Datastream)

The loan rates on loans of different maturity have moderately decreased indicating a weak confirmation of the first hypothesis. The fact that the external finance premium has decreased relatively more in Netherlands, Germany, France and Spain can be a consequence of the major role Italy played in the Euro sovereign debt crisis. The fear of default of the Italian government can lay a risk premium on loans which originate in Italy, thus increasing the external finance premium.

Figure 11: Loan supply Main Financial Institutions of Italy to Italian residents.

(Source: Datastream)

Figure 12: Growth rate loans to non-financial corporations in Italy. (Source: Datastream) 0 1 2 3 4 5 6 7 01 /01/2 011 01 /0 5/ 2 01 1 01 /09/2 011 01 /01/2 012 01 /05/2 012 01 /0 9/ 2 01 2 01 /01/2 013 01 /05/2 013 01 /09/2 013 01 /0 1/ 2 01 4 01 /05/2 014 01 /09/2 014 01 /01/2 015 %

Loan rates to NFC's

1-5y 0.25 - 1 mill < 0.25 mill > 1 mill -6 -4 -2 0 2 4 6 8 01 /01/2 011 01 /06/2 011 01 /11/2 011 01 /04/2 012 01 /09/2 012 01 /02/2 013 01 /07/2 013 01 /12/2 013 01 /05/2 014 01 /10/2 014 01 /03/2 015

Growth rate loans to NFC's

Growth rate, % 320000 330000 340000 350000 360000 370000 380000 390000 400000 410000 420000 01 /01/2 011 01 /07/2 011 01 /01/2 012 01 /07/2 012 01 /01/2 013 01 /07/2 013 01 /01/2 014 01 /07/2 014 01 /01/2 015

MFI loans to Italian residents

Amounts * million euros

In figure 11 and 12 total loans from the Main Financial Institutions of Italy to Italian residents is displayed and also the growth rate of loans to the non-financial corporations. Until the beginning of 2014, a negative trend can be seen, especially in the graph of the growth rates. But from 2014 on, a clear positive trend takes over in both graphs indicating loan growth only in the last part of the period of unconventional monetary policy. It is fair to say that this expectation of increasing loan supply will hold in the future, because the ECB has recently implemented quantitative easing as severe stimulus for the Euro zone economy. The second hypothesis is thus confirmed, but only based on the last year of the dataset.

Eurozone

Figure 13: Loan rates to non-financial companies in the Euro zone; amounts and maturity. (Source: Datastream)

Now for the complete Eurozone, a slight but steady downwards trend is reflected by the graph of loan rates to non-financial companies, with different amounts and maturities. The external finance

premium has indeed decreased over the stretch of unconventional policy measures. Once again, this trend is enlarged from October 2014 on, indicating the start of the asset purchase programmes of the ECB. 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 01 /01/2 011 01 /04/2 011 01 /07/2 011 01 /10/2 011 01 /01/2 012 01 /04/2 012 01 /07/2 012 01 /10/2 012 01 /01/2 013 01 /04/2 013 01 /07/2 013 01 /10/2 013 01 /01/2 014 01 /04/2 014 01 /07/2 014 01 /10/2 014 01 /0 1/ 2 01 5 01 /04/2 015 %

Loan rates to NFC's

> 1 mill, 1-5y > 1 mill, <5y > 1 mill, <1y < 1 mill, 1-5y < 1 mill, >5y < 1 mill, 1y

4000000 4100000 4200000 4300000 4400000 4500000 4600000 4700000 4800000 01 /0 1/ 2 01 1 01 /09/2 011 01 /05/2 012 01 /01/2 013 01 /09/2 013 01 /0 5/ 2 01 4 01 /01/2 015

Total loans to NFC's

Amounts * million euros 950000 1000000 1050000 1100000 1150000 1200000 01 /01/2 011 01 /09/2 011 01 /05/2 012 01 /01/2 013 01 /09/2 013 01 /05/2 014 01 /01/2 015

Loans to NFC's, <1y

Amounts * million euros 0 200000 400000 600000 800000 1000000 01 /01/2 011 01 /09/2 011 01 /05/2 012 01 /01/2 013 01 /09/2 013 01 /05/2 014 01 /01/2 015

Loans to NFC's, 1-5y

Amounts * million euros 2300000 2350000 2400000 2450000 2500000 2550000 2600000 2650000 2700000 2750000 01 /01/2 011 01 /09/2 011 01 /05/2 012 01 /01/2 013 01 /09/2 013 01 /05/2 014 01 /01/2 015

Loans to NFC's, >5y

Amounts * million euros

The graphs of the absolute amounts of loan supply show an unusual trend. The loan supply decreases during most of the period, only showing a very slight spike at the beginning of 2015, at the time the public sector purchase programme was announced. This is not enough to conclude a causal

The second part of the results will based on the bank lending survey of the ECB:

Enterprises

Credit Standards Demand

14Q2 14Q3 14Q4 15Q1 14Q2 14Q3 14Q4 15Q1 Euro Area -3 -2 -5 -9 4 6 18 6 Germany 0 -3 0 -3 3 6 22 0 France 0 0 0 0 20 20 40 30 Italy -2 -4 -7 -7 -2 17 13 -3 Spain -13 0 -25 -25 0 -13 0 0 Netherlands 0 14 14 -13 -29 0 14 0 Consumer credit

Credit standards Demand

14Q2 14Q3 14Q4 15Q1 14Q2 14Q3 14Q4 15Q1 Euro Area -2 -7 -3 -5 17 10 15 13 Germany -7 -3 -10 0 6 16 23 13 France 0 0 0 0 50 30 30 20 Italy 0 -28 0 -14 6 5 -5 20 Spain 0 0 0 -13 13 -13 25 25 Netherlands 0 0 0 0 0 20 0 -17

The above tables are based on the bank lending survey of the ECB of the second, third and fourth quarter of 2014, and the first quarter of 2015. Credit is separated in two categories: credit for enterprises, and credit for consumers. The numbers in the table represent net percentage of banks reporting tightening credit standards or positive loan demand. Thus -2% under credit standards means 2% of the reporting banks reported a credit standard easing.

A green cell represents a net easing of credit standards, compared to the previous quarter, a yellow cell is neutral and a red cell is a credit standard tightening.

As can be derived from the table, the Euro area experienced a net credit standard easing for the first quarter of 2015, while loan demand declined.

Furthermore, the BLS of the first quarter of 2015 was enhanced with ad hoc questions, addressing the impact of the asset purchase programmes of the ECB, namely the third covered bond purchase programme, the asset backed securities programme and the public sector purchase programme (QE). An overview of the outcome of these questions will be given below and the results will be discussed, which will contribute to a more profound answer of the research question.

(1) Please also take into account any effect of state guarantees vis-à-vis debt securities and recapitalisation support. (2) Please select "N/A" (not applicable) if and only if the source of funding is not relevant for your bank. (3) Usually involves on-balance sheet funding. (4) Usually involves the sale of loans from banks’ balance sheets, i.e. off-balance sheet funding (5) Usually involves the use of credit derivatives, with the loans remaining on banks’ balance sheets.

Notes: “- -“ = deteriorated considerably/will deteriorate considerably; “-“ = deteriorated somewhat/will deteriorate somewhat; “o”= remained unchanged/will remain unchanged; “+” = eased somewhat/will ease somewhat; “++” = eased considerably/will ease considerably. The mean and standard deviation are calculated by attributing the values 1 to 5 to the first possible answer and consequently for the others. Figures may not exactly sum up due to rounding.

The result of question A1 dictates that most of the banks are influenced by the asset purchase programmes through their answers on (A) total assets, (B) their liquidity position and (C) their financing conditions. Both over the last six months, as the next six months, a large part of the bank responded “eased / will ease considerably” (+). As mentioned in section 2, this concerns the easing of credit standards through the balance sheet channel.

Now the above tables provides insight in the ultimate benefits of the enhanced liquidity position of the commercial bank in the euro area. The enhanced liquidity position originates in both the proceeds from the sale of marketable assets and the increased liquidity owned to an increase in customer deposits from enterprises and households. What stands out is two things: (1) the highest percentage in the column “Will contribute somewhat to this purpose” both in the past six months and the next six months is the benefit of the increased liquidity position to grant loans to non-financial corporations. (Past six months: (A) 26% (B) 29% and the next six months: (A) 31% (B) 44%). “Will contribute somewhat to this purpose” does not sound very significant, but this is relatively the greatest benefit. The highest overall percentage is denoted at the considerable impact on granting loans in the next six months (44%), meaning loan officers are expecting to grant more loans during the next 6 months because of the extra liquidity.

(2) Enforcing the statement that the liquidity position contributes the most to the increased granting of loans is the fact the that of the three purposes mentioned in the table (Refinancing, Granting loans and Purchasing assets), Granting loans has in total the highest percentage. Meaning that liquidity has the relative most impact on the increase of lending. Overall this table indicates loan officers are expecting to increase lending due to the asset purchase programme of the ECB.

Notes: “- -“ = deteriorated considerably/will deteriorate considerably; “-“ = deteriorated somewhat/will deteriorate somewhat; “o”= remained unchanged/will remain unchanged; “+” = eased somewhat/will ease somewhat; “++” = eased considerably/will ease considerably. The mean and standard deviation are calculated by attributing the values 1 to 5 to the first possible answer and consequently for the others. Figures may not exactly sum up due to rounding.

From the table of ad hoc question A5, addressing the change in lending behavior due to the expanded asset purchase programme of the ECB, three things stand out:

(1) The impact may not be very significant in an absolute way, especially looking at the past six months. However, the relative shift from “remained unchanged’ to “will ease somewhat’ comparing the answers of the past six months and the next six months is indeed considerable. This indicates a movement of easing terms and conditions attributable to the implementation of quantitative easing, possibly accelerating in the next 6 months.

(2) Terms and conditions are more influenced than credit standards. This can lead to increased lending.

(3) For the economy of the Euro area start growing again, investment stimulus is needed. In the analysis of this table, the loans to enterprises are shifting the most from unchanged to somewhat eased. This effect could pick up and lead to more investment and thus economic activity.

Section 4 Conclusions

The credit channel transmission mechanism of ECB policy has been widely researched, but not using unconventional policy shocks, while interest rates are at their zero lower bound.

Concluding, this paper aimed at answering the research question: Do unconventional monetary policy measures by the European Central Bank, after the crisis, have a significant impact on the loan supply of commercial banks in the Euro zone?

The methodology consisted of two hypotheses tested by statistical research using Datastream and the ECB’s Bank Lending Survey, concerning lending data for the Eurozone in the period from

01/01/2011 until now. The hypotheses were (1) Unconventional monetary policy decreases the external finance premium and (2) Quantitative easing in the Euro zone increases loan supply.

The results reveal that for all member states including the Eurozone as a whole the external premium has indeed lowered, meaning there is a significant influence of unconventional monetary policy on interest rates of intermediated loans. Continuing, for Spain the loan supply had indeed increased attributable to unconventional monetary policy, whereas for Italy and the Eurozone the results exhibit weak confirmation of the hypothesis. The results for the Netherlands and Germany reveal no clear cut evidence on the increase of loan supply because of ECB policy. Furthermore the Bank Lending Survey reveals a positive development regarding lending behavior by intermediaries.

Most of the benefits of the enhanced liquidity position is used to grant new loans. There is an increase in easing of credit standards, especially since the public sector purchase programme (QE) has

commenced. Overall the asset purchase programmes from October 2014 and on have the most impact. A clear dip can be observed in most of the graphs indicating interest rates on loans of the specific member states.

Finally the results so far have been considerable but not greatly significant, however the expectation is that loan supply will continue to pick up as long as the asset purchase programmes remain in place. Yet further research has to be conducted, in a sense that when sufficient data is available, (Structural) Vector Auto Regressions should point out if the change in loan supply is really quantitatively

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