Euro-Area and US Banks Behavior, and ECB-Fed Monetary Policies during the Global Financial Crisis: A Comparison

This paper compares the behavior of Euro-Area (EA) banks’ credit and reserves with those of US banks following respective major crisis triggers (Lehman’s collapse in the US and the 2009 admission by Papandreou, that Greece’s deficit was substantially higher than previously believed, in the EA). The paper shows that, although the behavior of banks’ credit following those widely observed crisis triggers is similar in the EA and in the US, the behavior of their reserves is quite different. In particular, while US banks’ reserves have been on an uninterrupted upward trend since Lehman’s collapse, those of EA banks fluctuated markedly in both directions. The paper argues that, at the source, this is due to differences in the liquidity injections procedures between the Eurosystem and the Fed. Those different procedures are traced, in turn, to differences in the relative importance of banking credit within the total amount of credit intermediated through banks and bond issues in the EA and the US as well as to the higher institutional aversion of the ECB to inflation relatively to that of the Fed.