Monetary Policy and Banks in the Euro Area: The Tale of Two Crises

• Published in: Journal of macroeconomics Vol. 39; pp. 387 - 400
• Main Author: Reichlin, Lucrezia
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier Inc 01.03.2014; Elsevier Science Ltd
• Subjects: Balance sheets; Bank behavior; Banking industry; Central banks; ECB policies; Economic crisis; Economic recessions; Eurozone; Financial system; Monetary policy; Recessions; Studies; Europe; E44; G21; E58; Bank behavior; Economic recessions; ECB policies; Financial system
• ISSN: 0164-0704; 1873-152X
• DOI: 10.1016/j.jmacro.2013.09.012

•The paper describes monetary policy and banks’ behaviour during the two recent euro area recessions.•It points to a decreased effectiveness of ECB liquidity policy in the second crisis.•It attributes it to financial sector adjustment facing solvency problems which were not dealt withs. The paper is a narrative on monetary policy and the banking sector during the two recent euro area recessions. It shows that while in the two episodes of recession and financial stress the ECB acted aggressively providing liquidity to banks, the second recession, unlike the first, has been characterized by an abnormal decline of loans with respect to both real economic activity and the monetary aggregates. It conjectures that this fact is explained by the postponement of the adjustment in the banking sector. It shows that euro area banks, over the 2008–2012 period, did not change neither the capital to asset ratio nor the size of their balance sheet relative to GDP keeping them at the pre-crisis level. The paper also describes other aspects of banks’ balance sheet adjustment during the two crises pointing to a progressive dismantling of financial integration involving the inter-bank market since the first crisis and the market for government bonds since the second.