The Effects of the ECB’s Unconventional Monetary Policies from 2011 to 2018 on Banking Assets

We examine the implications of all three major ECB’s unconventional monetary policies, LTRO, asset purchase programs and deposit facility rate for bank investments among loans, government securities and cash deposited in central banks. Our results highlight that unconventional policies represent the driving force for bank credit in times of financial distress as the standard macroeconomic and bank-specific factors could affect banks’ incentives adversely in such times. We distinguish the effects of the first round LTRO and the effects of the targeted LTRO in order to capture if the introduction of a borrowing constraint on banks’ loans holdings would impact differently banks’ investment choices between loans and government securities. We document that targeted LTRO actually played a key role in turning around the adverse bank investment behavior between loans and government bonds in crisis countries and by that, in attenuating the financial stress across the eurozone. This result has monetary policy implications as it suggests that the structure of the program is the key driver to the desired effects rather than its magnitude. We find that the effects of the asset purchase programs are homogenous across the two country sets and uniformly affect higher loadings on government securities